Home Equity Lines of Credit and Interest Rates

Consumers are discovering the value of opening home equity lines of credit (HELOCs). According to findings by Equifax, Americans opened nearly 16 percent more HELOCs in 2014 than they had the previous year, with $1.2 million 2014 totals setting a six-year high. Gains in employment and mortgage write-offs accounted for the surge, Equifax said.

Consumers are opting to open HELOCs in lieu of using credit cards for immediate expenses such as home improvements, college tuition, or vacations. During the draw period, homeowners borrow money and lenders establish the monthly repayment based on the total amount of the loan and the interest rate applied to the HELOC. Unlike a home equity loan, a HELOC does not require consumers to draw the total amount at once. You pay interest only on the amount you use. Customarily, borrowers can obtain HELOCs at 75 to 80 percent of the value of the home, after deducting the total remaining on the mortgage. Consequently, it's important to evaluate the HELOC options that impact how much you pay.

Fixed-rate vs Variable-rate HELOCs  

Tapping into home equity to borrow for improvements that increase value can make a lot of sense. Traditionally, HELOCs are offered to consumers with variable interest rates. Depending on trends in the economy, you can end up paying much more long-term on the HELOC if interest rates rise. Today's lenders now offer hybrid HELOCs that come with fixed interest rates, making it especially easy for borrowers to determine how much to have on hand to make monthly payments. It can be a wise decision for those making improvements and planning to live in their residence for five more years or longer. For people who intend to remain in their homes for the short term, a variable rate HELOC may make more sense since the interest rates are typically established at lower points than for fixed-rate products.

Interest Rates Climbing Slowly, Trending in Favor of Fixed-Rate HELOCs

There is no substitute for research and evaluating lenders if you want to save money. In June 2015, introductory rates for consumers in the 700-850 FICO range vary greatly by lender. One back offers 7.35%, while another offers 5.88%, both with no required draw and 80% loan to value. And in considering fixed versus variable interest rates, it's critical to examine trends.

Between the end of 2014 and mid-year 2015, the interest rate on a 30k HELOC climbed from 4.93 to 5.17. Forecasters at Forbes Magazine reported in March 2015 that while rates were rising at a "mild pace", banks under the direction of the Fed are expected to increase rates through 2015 and at least up to the end of 2016.

It's really up to each consumer to determine the worthiness of a fixed-rate vs variable-rate HELOC based on the amount of money they expect to borrow, their current financial abilities to assume new monthly payments, and their long-term expectations for remaining at home. One way to get a handle on available HELOCs and rates is to compare lenders at LendingTree.

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