Rates on a home equity line of credit are low, averaging 3.65% for a 10-year HELOC and 5.96% for a 20-year HELOC, according to Bankrate data for the week beginning Nov. 1 . (See the lowest HELOC rates you can qualify for here.) And some borrowers will pay significantly less: “Keep in mind that the rate a borrower gets can vary widely, with the typical range of rates offered to HELOC borrowers being between 1.89% and 8%,” says Jacob Channel, Senior Economic Analyst at LendingTree. While those most likely to get a rate below 2% on a HELOC are people with credit scores of 760 and above, among other financially favorable characteristics, there are plenty of other ways to get the rate. Lowest HELOC for you – even if you don’t fall into that bucket. Here’s how.
1. Find a better financial situation
The first thing you want to look at is your credit score. “The higher a borrower’s score and the more equity they have built up in their home, the more attractive they will be to lenders and the more likely they are to get a good rate,” says Channel. Lenders like to see scores above 760 before offering their most competitive rates, experts say, but if your credit score doesn’t fall into the upper echelon, don’t despair. “If you make all your payments on time and repay all revolving debts, time will heal the wounds. If you’re close to the threshold, making a large payment on a revolving balance or using something like Experian Boost could get you over the threshold fairly quickly,” says Greg McBride, chief financial analyst at Bankrate.
Lenders also like to see a low debt-to-income ratio (this is measured by adding up all your monthly debt payments and dividing by your gross monthly income; lenders generally give the best rates to those with a DTI of around 36 % or less), sufficient income and a reliable payment history.
2. Make sure you have at least 20% equity in your home
“The more equity you have, the better off you will be. Aim to keep at least a 20% untapped stake, and even more can get you a better deal,” McBride says. With the constant rise in real estate prices, many people may actually have this equity without even realizing it.
3. Consider the low price introductory offersbut know what comes next
A number of banks are now offering introductory offers at very low rates. For example, Bank of America currently offers a low variable introductory rate of 1.990% for 6 months, in which case the rate increases to 4.400% for the remainder of the loan. But these aren’t for everyone, and you should “pay close attention to how long it lasts and your minimum payment when the promotional rate expires and the rate returns to its standard level,” says McBride.
4. Shop around at different banks, including the one that holds your mortgage
Get rates and terms from 3-5 different lenders. “Because different lenders offer different rates, those who shop around before applying for a HELOC further increase their chances of getting the best possible rate,” Channel says.
4. Examine a conversion clause
Since HELOCs typically have variable rates that can change over the life of the loan, some lenders allow borrowers to change their interest rates from variable to fixed during the drawdown period. This can be useful when interest rates are expected to rise, as it allows a borrower to lock in a lower fixed rate. Additionally, some lenders even allow borrowers to switch back to the variable rate when rates start to drop.
5. Know that it’s not just about the prices
It is important that you also factor in fees and closing costs into your analysis of which lender to choose. “Fees and closing costs can vary between lenders, so it’s important to compare annual percentage rates (APRs) side-by-side as fees and one-time costs,” says Paul Appleton , Head of Consumer Lending at Union Bank.
Also watch out for prepayment penalties, as some lenders penalize borrowers who repay their loan earlier than expected. This is especially relevant for someone who might sell their home before the HELOC is fully paid off.
It is also essential that you watch the end of the draw period. HELOCs typically operate on a 30-year schedule, with the first 10 years serving as the drawdown period (i.e., the time you have to tap into that available credit) and the last 20 years serving as the repayment period. . During the drawdown period, you can only be required to pay interest and the repayment period marks the start of repayment of the principal part of the loan. But, it’s not uncommon for HELOCs to come with lump sum payments, or a period where the amount of repayment is lower, followed by a lump sum due at the end. If you enroll in one of these HELOCs, make sure you have enough money set aside for the final payment.