Are you trying to determine whether or not a HELOC (Home Equity Line of Credit) is suitable for you and looking for the best deal? In that case, it's essential to understand what HELOC interest rates are based on, what affects them, and how to find the lowest ones. This article will explain how you can secure the best HELOC rates.
- Your HELOC rate is based on two main factors: the prime rate used by banks and a margin determined by your financial situation and history.
- When determining your margin or markup, the lender will look at your credit score and CLTV, among other things.
- To improve your chances of scoring a low HELOC interest rate, stay on top of your credit score and make sure you have enough home equity.
- Keep in mind that different lenders will offer different rates, so make sure you shop around and consider all your options to find the best rates.
A quick look at how HELOC rates work
The typical HELOC has an adjustable interest rate, which means it can rise and fall over the loan term. There are two main factors that determine the interest on your credit line – the prime rate used by your lender, which is variable, and a margin determined by your financial situation and history, which remains constant.
The prime rate, which is the interest commercial banks charge their biggest, most creditworthy clients, is largely dependent on the federal funds rate set by the monetary-policy setting committee at the Federal Reserve. So when the Fed decides to raise or lower the federal funds rate, your bank’s benchmark prime rate follows in the same direction, and so does your HELOC rate.
As for the margin, your lender will look at your payment history, CLTV (Combined Loan-to-Value ratio), and FICO credit score because they want to make sure that you will be able to keep up with payments when the time comes to repay what you've borrowed. Therefore, the riskier the lender finds it to lend you money, the higher the rates you will get. Lenders often look for a credit score of at least 620 and a CLTV under 80%, although this will vary by lender.
The amount of money you want to borrow and the duration of your HELOC can affect your rates as well. You can learn more about what HELOC rates are based upon in this article.
How do I secure the lowest rate?
Now that you know how HELOC rates generally work let's look at some strategies for securing a low rate.
When trying to find the best HELOC rate, the first thing you need to do is check with several lenders and compare what they offer. Rates can vary greatly depending on the lender, so make sure to consider all your options. Look at big national banks, smaller local banks, credit unions, and online lenders to find the best one. Keep in mind that you need to look at more than the initial rate to get a good sense of the most beneficial offer. Check how long the initial rate will last, what will happen after it expires, and the maximum rate. Also, look up any closing costs, balloon payments, inactivity fees, annual fees, and other hidden fees. Consider all these factors when comparing lenders. Keep in mind that due to the COVID-19 pandemic, some lenders have halted HELOC applications, and others have significantly raised their requirements.
Another crucial step to securing a low HELOC rate is making sure your FICO credit score is the best it can be. Whether your score is excellent or below average can significantly affect the margin your lender will add on top of the prime rate, so before applying for a HELOC, you will want to do what you can to maintain good credit. Check that you don't have any old debt weighing your score down, and make sure to make payments on time. Accounts being sent to collections and late payments affect your score; the later, the worse. Don't take on any new debt right before your HELOC application, as this can negatively affect your credit as well. Also, don't close any old credit accounts right before applying, even if they are fully paid off, since this would reduce the total amount of revolving credit available to you. If your credit utilization ratio, or the total debt you're carrying divided by the total credit available to you, increases, it may negatively impact your credit score.
Make sure you have enough equity in your home before applying if you want your rate to be as low as possible. The more equity you have, the less risky you will look to lenders. High equity means a low CLTV or Combined Loan-to-Value ratio. Your CLTV is calculated by adding up your loan balances and dividing by the appraised value of your home. Many lenders want you to have around 20% equity and a CLTV of under 80%. However, it varies, and some may accept as low as 10-15% equity. If you have very little equity, you may want to consider waiting and trying to pay off a bit more of your mortgage before applying for a HELOC.
Consider an alternative
One alternative to a traditional HELOC is a HELOC Card. A HELOC Card works just like any other credit card on the market and allows you to access funds immediately to pay for items and services when you need them. However, unlike other credit cards, it is backed by your home equity, just like a HELOC loan. This can lead to significantly lower interest rates compared to other credit cards.
If you are looking for a more affordable alternative to a HELOC, a HELOC Card could be beneficial as it may come with significantly lower fees. For example, you could be avoiding closing costs, appraisal fees, annual fees, and inactivity fees. Also, if you use your HELOC Card to pay for home improvements, the interest on your HELOC Card may be tax-deductible.
The Aven HELOC Card is a credit card in the front, home equity in the back. Aven is the world's first home equity backed credit card and combines the low interest rates of a home equity line of credit with the flexibility of a credit card. Find out more!