HELOC Loans: Compare Top Lenders, Rates for December, 2022
What is a good HELOC rate?
Several factors affect your HELOC rate. Among them are the current prime rate, your credit score and the lender's appetite for home equity lending. The best way to discover whether you're being quoted a good HELOC rate is to apply with more than one lender. Then you can compare HELOC offers.
Some lenders offer low promotional HELOC rates, which go up after a set number of months. These "teaser rates" are nice, but pay attention to what the interest rate will be after the promotional period expires.
Will HELOC rates go up or down?
Rates on HELOCs are tied to the prime rate, which in turn is indexed to the federal funds rate. The Federal Reserve sets the federal funds rate. When the Fed raises the federal funds rate, the prime rate goes up, and HELOC rates follow. When the Fed cuts the federal funds rate, the prime rate goes down and so do HELOC rates.
Keep up on the Federal Reserve's ups and downs on NerdWallet's explanation of how the Fed affects mortgage and HELOC rates.
How much does a HELOC cost?
Upfront costs for HELOCs are usually lower than for first-lien mortgages. Lenders often waive closing costs on the condition that you keep the line open for a certain time. Some lenders may require an appraisal.
Once you have a HELOC, the costs vary, depending on the interest rate, the amount borrowed and whether the credit line is in the draw period or the repayment period.
During the draw period, you may borrow against the credit line. The minimum monthly payments during the draw period are usually interest-only, although you may repay principal if you wish. The draw period is often 10 years, but it may vary. During the repayment period, you pay the loan off. You may no longer borrow against the credit line, and the minimum monthly payments include principal and interest.
Pros and cons of HELOCs
The main advantage of a HELOC is its flexibility: You draw money only when you need it, and pay interest only on that amount. Meanwhile, you can repay as much or as little of the principal as you want during the draw period. The main drawbacks have to do with variable rates and putting your home at risk.
You pay interest only on the amount you have borrowed: If you have a credit line limit of $50,000, and you've borrowed $10,000, you pay interest only on that smaller amount.
Interest-only payments during the draw period.
A flexible way to pay for recurring expenses, such as a series of home renovations or tuition payments.
A variable interest rate means that when the Fed raises the federal funds rate, your monthly payments may go up.
You could lose your home if you fail to repay.
How are HELOC rates set?
HELOCs are indexed to the Wall Street Journal prime rate, which is the base interest rate on corporate loans by large banks. The prime rate, in turn, moves up and down in sync with changes to the federal funds rate, which is set by the Federal Reserve.
The rate on a HELOC is based on a margin above (or below) the prime rate. For example, a bank might give you a HELOC at a rate of prime plus 1%. The "plus 1%" is the margin, and your interest rate is the margin added to the prime rate.
Let's say the prime rate is 4.75% and your margin is +1%. When you add them, you get 5.75%, and that's the rate on your HELOC. In this case, if the prime rate went up a quarter of a percentage point, to 5%, then your HELOC's rate would rise the same amount, to 6%.
Margins vary, based on factors such as credit score, the loan-to-value ratio, whether you have another account with the bank you get a HELOC from, and the lender's eagerness to underwrite HELOCs. That's why it's important to shop around — each lender might quote you a different interest rate.
Which is better: HELOC or home equity loan?
HELOCs have variable rates, which change whenever the Fed raises or cuts short-term interest rates. Home equity loans have fixed interest rates. A HELOC is a line of credit, and you pay interest only on the portion that you borrow. A home equity loan is a lump-sum loan, and you pay interest on the full amount.
Which is the better option? It depends on how you use the money. A HELOC is well-suited for recurring expenses, such as a multistage renovation project or tuition. A home equity loan is suitable for one-time expenses.
» MORE: Home equity loans vs. HELOCs
Is it easy to get a HELOC?
A HELOC requires you to provide some of the same documentation you gave when you got the mortgage to buy the home: at minimum, proof of income and assets and a list of monthly debt payments. The lender will check your credit report.
After applying, you'll be given a stack of disclosures to read. Underwriting may take anything from hours to weeks, and then you'll close on the credit line, similar to closing on the purchase mortgage.
Are there closing costs on a HELOC?
A HELOC may require an application fee, title search, appraisal and attorney’s fees. You may be given the option of paying discount points to reduce the interest rate.
Do you need an appraisal for a HELOC?
The lender may require an appraisal to determine the amount of your credit line. You may be required to pay for the appraisal upfront. In some cases, the lender may pay for the appraisal and waive the fee if you keep the account open for a specified number of years.
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About the author: Holden is NerdWallet's authority on mortgages and real estate. He has reported on mortgages since 2001, winning multiple awards.