Most HELOC rates are tied to the prime rate, which is a variable interest rate determined by individual banks. Many banks choose to set their prime rates based on the federal funds rate targets set by the Federal Reserve, which makes them more volatile especially in rising rate environments.
There are a number of factors that determine home equity line of credit rates.
• Your home equity. The more equity you leave in your home, the better your HELOC rate will be. Borrowing 80% or less of your home’s equity is likely to get you lower rates.
• Your credit score. A 740 score or higher is recommended to get the lowest HELOC rate offers.
• Your debt-to-income (DTI) ratio. A low DTI ratio, which is a measure of your gross monthly income relative to your monthly debt, will also help drive your HELOC rate down. The less monthly debt you have compared to your income, the better.
• The index used for interest rate adjustments. You should receive information about how much and how frequently the index (such as the prime rate) might change.
• The margin used for adjustments. A HELOC margin is a set amount added to your index that determines your HELOC rate.
• The teaser rate. You may be offered a lower rate for an introductory period. For example, a lender might discount the rate for the first six months. After the teaser rate ends, though, the rate typically increases based on the margin and index in your agreement.
• The periodic cap. This number tells you how much and how often your rate can change at a given time.
• The lifetime cap. The cap sets a limit on how high your rate can rise during your HELOC term.