Compare Home Equity Line of Credit Rates and Offers

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

1. The draw period. A set time period (usually 10 years) when you can withdraw money and repay the balance as needed.
2. Payments during the draw period. Your monthly payment is based on the amount you draw.
3. Variable rates. Most HELOC rates are based on an index and margin that can change with financial markets during the draw and repayment period.
4. Interest-only payment option. You might be able to pay only the interest due on the amount you draw each month. However, interest-only payments only last until the draw period ends.
5. Repayment period. The loan term that begins when the draw period ends, which requires payment of the remaining balance and prohibits any additional credit line withdrawals.
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 value is likely to get you lower rates.
• Your credit score. A 740 score or higher is recommended to get the lowest HELOC rate offered.
• 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 higher the margin, the more your payment could increase over time.
• 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.

A HELOC is one of the few mortgage products that allows you to pay only the interest due each month. However, the interest-only feature comes with some important pros and cons:

Pros 

  You’ll have a much lower payment during the interest-only period

  Your interest may be tax-deductible if used for home improvement

  You’ll free up room in your budget to pay off other debt or build your savings

  Your payment will only be based on the amount you draw

Cons 

  Your loan balance stays the same

  You may not be able to afford the payment once the interest-only period ends

  You could lose your home to foreclosure

  You’ll have less equity if you don’t pay down the credit line 

Finding the best interest-only HELOC lenders in your area

Unlike a regular mortgage, you won’t receive a loan estimate for an interest-only HELOC. Instead, you’ll get a truth-in-lending disclosure with all the details about your interest-only HELOC. When you receive it, be sure you understand: 

• How long the interest-only period lasts
• How long the draw period lasts
• How your payment is calculated when the draw period ends
• Any ongoing maintenance charges
• Whether there is a close out fee
• Which variable rate index the credit line is tied to 

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. For example, a big influx of customer 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.

A HELOC isn’t the only way to put your home equity to work. You can also tap equity with a home equity loan or a cash-out refinance. With a home equity loan, you receive your funds in lump sum and make fixed-rate payments for five to 30 years.

If traditional mortgage rates are low, you can borrow more than you currently owe and pocket the difference with a cash-out refinance. Repayment terms are available up to 30 years, and you can qualify with lower credit scores than HELOCs typically allow.

Below is a breakdown of key differences between these equity-tapping home loan options:

A HELOC is a 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.
• 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.

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 or business startup expenses.
• You want the long-term stability of a fixed interest rate.

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.

The table below shows the differences between a HELOC, a home equity loan and a cash-out refinance.