Average rates on these types of HELOCs have just dropped significantly, to less than 3%

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Some HELOC rates fell further for the week, with an average interest rate of 2.55% for a 10-year repayment period, the lowest since Bankrate started tracking that number in September. Rates reached 5.91% (up slightly from 5.89% the previous week) for a 20-year repayment period (down from the previous week). Sure, many people will get higher rates, but others can get much lower rates: some HELOC rates now start below 2%, and you can find the rates you qualify for here. But HELOCs aren’t for everyone, and here’s what you need to know before considering one.

How does a HELOC work?

A home equity line of credit, colloquially known as HELOC, is a type of loan borrowed against the available equity of the home, in which the lender provides a revolving line of credit to homeowners. Since HELOCs generally have variable interest rates, the amount you owe during the repayment period will vary depending on the base interest rates and their trend.

These types of loans tend to work well for those who don’t need a sum of money all at once (if this is your case, a home equity loan might be better; find the best rates. home equity loans you can claim here and “A home equity line of credit offers the lowest interest rate and the most flexibility, both in terms of being able to borrow money as needed rather than one-off, and flexibility in repayment terms for the first 10 years, “says Greg McBride, chief financial analyst at Bankrate. Experts say some of the best uses of a HELOC are for a project. home improvement, to pay for medical bills or to consolidate high interest debt.

HELOCs generally contain drawdown periods during which the borrower is allowed to withdraw their line of credit. During the drawdown period, which is usually 10 years, the borrower is usually only required to pay interest on the loan; Once the drawdown period ends, the borrower can no longer use the line of credit and must repay the loan balance, including principal and interest. This repayment period usually lasts 20 years. Note that your HELOC may contain a conversion clause, which allows a loan to go from a variable rate to a fixed interest rate for an additional fee for a specified period during the loan.

The main caveat with a HELOC is that you’re using your home as collateral, so if you’re having financial trouble and can’t make the payments, your home may be in jeopardy, says Bobbi Rebell, Certified Financial Planner and Personal Finance. expert at Tally. Another thing to keep in mind is the HELOC fees – the upfront fees including application fees, title search, assessment and more can run into the hundreds of dollars, so if you’re looking for a small one. ready, there might be a better solution.

How much money can I borrow with a HELOC?

You’ll need the equity in your home to get a HELOC, and lenders typically allow borrowers to withdraw up to about 85% of their home’s value.

How much will I pay for a HELOC?

You need things like a good credit score (the best rates usually go to people with a score of 740 or higher, but you can qualify for a HELOC with a lower score); a reasonable debt-to-income ratio (lower is better, 43% being roughly the highest acceptable number); and an acceptable loan-to-value ratio. To calculate the LTV ratio, divide the amount borrowed by the appraised value of the property. If a home is valued at $ 400,000 and your mortgage balance is $ 140,000, your LTV is 35%.

“A credit score of 740 will usually get you the best HELOC rates, although some lenders set the bar even higher. Although some lenders allow you to borrow up to 85% of the value of your home, if you borrow 70% or less, you will likely get a better rate, ”says Denny Ceizyk, editor at LendingTree. McBride adds, “Keeping your total loan amount, including your first mortgage and the line of credit you’re looking for, at a maximum of 80% of the home’s value is a common prerequisite for the best rates,” explains McBride.

According to Holden Lewis, real estate and mortgage expert at NerdWallet, the best HELOC rates go to clients with the following characteristics: “Their monthly HELOC payment is automatically debited from another account at the same bank, they have a high credit rating ( usually higher) and the line of credit is 70% or less of the appraised value of the home, ”says Lewis.

How to get a HELOC?

McBride recommends making comparisons between lenders to find the best rates. Get quotes from 3 to 5 different lenders and compare not only rates, but also terms. Also ask about discounts: Ceizyk says you might get additional discounts if you tie your monthly payment to your checking or savings account.

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