Compare Home Equity Line of Credit Offers

Unlike a traditional fixed-rate mortgage loan or home equity loan, you won’t have a set payment at first, and a HELOC rate is usually variable. Here are six important features of a HELOC: 

1. The draw period. A set time period (usually 10 years) when you can withdraw money and pay off the balance as needed. 
2. Payments during the draw period. Your monthly payment is based on the amount you draw. In many cases, interest-only payments can be made on the balance during the draw period.
3. Variable rates. Most HELOC rates are based on an index and margin that can change with financial markets during the draw period.
4. Interest-only payment option. You might be able to pay only the interest due on the amount you draw each month. 
5. Repayment period. The term of the loan that begins when the draw period ends, requiring payment of the remaining balance in fixed installments. 
6. Payments during the repayment period. Any outstanding balance owed at the end of the draw period must be paid in fixed principal and interest installments for the rest of the loan term.

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.

Keep in mind that getting a HELOC means you’re using your home as collateral to secure the loan. That means you can lose it to foreclosure if you fail to repay what you owe. Still, it may make sense to take out a HELOC if:

• You’re planning smaller home improvement projects. You can draw on your credit line for home renovations over time instead of paying for them all at once. 

• You need a cushion for medical expenses. A HELOC gives you an alternative to depleting your cash reserves for unexpectedly hefty medical bills. 

• You need extra funds to manage side-hustle inventory costs. A big influx of orders may require a big inventory buy, and a HELOC may help you cover the costs. 

• You’re involved in fix-and-flip real estate ventures. Buying and fixing investment property can drain cash quickly; a HELOC leaves you with more capital to buy other properties. 

• You need to bridge the gap in variable income. A line of credit gives you a financial cushion during sudden drops in commissions or self-employed income.

You may need a higher credit score or be limited on how much equity you can tap as lenders tighten standards on HELOCs. Because borrowing guidelines vary widely from lender to lender, getting multiple HELOC rate quotes is more important than ever.

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The HELOC preapproval process is similar to applying for a regular mortgage. You’ll need to provide information about your income, have your credit pulled and the lender will need to verify the value of your home. However, having a few extra pieces of information will help you get the most accurate quote: 

1. Your current mortgage statement. Lenders will need to know how much you owe on your current mortgage. 
2. Your original closing paperwork. If you recently purchased your home, your lender may limit how much equity you can take out.

Important information about HELOC cost estimates

The annual percentage rate (APR) for a HELOC reflects interest only and doesn’t typically include all of the closing costs you might pay, according to the Federal Trade Commission. The Consumer Finance Protection Bureau (CFPB) suggests comparing the total fees each lender charges to ensure you’re getting the best deal.

A home equity loan allows you to tap equity, too, but the repayment terms and costs aren’t the same as with a HELOC. The key differences are:

1. You receive equity in a lump-sum cash payment and make fixed installment payments for five to 15 years, which removes the unpredictability of variable home equity line of credit rates.
2. You can’t reuse the funds once the balance is paid in full. 

A HELOC is better if:

• You want the flexibility to use the credit line and pay it off whenever you want.
• You want the lowest possible payment on the money you borrow.
• You have the resources to pay the balance down on a regular basis.
• You can cover short-term budget gaps if your income becomes unstable.

A home equity loan is better if:

• You have major projects you want to fund and want a set fixed repayment schedule.
• You want to replace high-interest, variable-rate debt with a fixed-rate loan.
• You need to finance a large, one-time financial need, such as higher education expenses or a business startup.
• You want the long-term stability of a fixed interest rate

If traditional mortgage rates are low, consider a cash-out refinance instead of a HELOC. A cash-out refinance replaces your current loan with a new mortgage at a higher amount, and you get the difference between the two in cash. You can pocket the extra money for home improvements or other financial goals. You can also pick a repayment term up to 30 years.

A cash-out refinance is better if:

• You can get a lower rate than you currently have.
• Your credit scores aren’t high enough to get a lower HELOC rate.
• You want to receive the extra cash in one lump sum.

A HELOC is better if:

• You want to leave your current mortgage alone because the rate is already low.
• You don’t need all the funds at once.
• You don’t have an immediate need for the money.