A Home Equity Line of Credit or HELOC is a great option when you want to borrow money against your home without refinancing. Unlike a home equity loan, a home equity line of credit (HELOC) is an open line of credit that uses your home as collateral. You draw from the account at your convenience and repay based on the terms of your HELOC. You can borrow in small chunks or a lump sum, pay it off every month, or pay it off slowly according to the terms of your HELOC.
A lot of homeowners have been asking me about introductory rates and how to get the best HELOC rate, so I hope this article helps.
How to Get the Best HELOC Rate:
5 Smart Tips
These HELOC tips will help you stay informed and save money. If you’re thinking about applying for a home equity line of credit, keep reading.
Tip 1. Make Sure Your Home Has Enough Equity
How do I know if I have enough equity in my home to apply for a HELOC? This is a question I get asked a lot when homeowners are thinking about getting a Home Equity Line of Credit (HELOC).
The more equity you have, the lower rate you’ll be offered. Why? Because your combined loan-to-value ratio (CLTV) will look better to lenders. HELOC rates are not connected to your zip code but they are connected to the equity you’ve built in your home. In a lot of areas, especially certain areas of California, Oregon and Washington, home values continue to rise. For these homeowners, it means higher equity in a short amount of time.
When a lender is considering your HELOC application, they look at the principal balance on your home loan plus any outstanding debts you might. This is measure against the current appraisal value of your home. The difference is your home equity.
Most lenders offer lower rates to homeowners who have substantial equity built in their home.
TIP: Less risk for the lender means a lower HELOC rate for you.
Tip 2. Maintain a Good Credit Rating for the Best HELOC Rate
A good credit rating always helps, especially when you decide to apply for a home equity line of credit. This probably isn’t news to you. But when you apply for a HELOC, your lender is going to consider the same risk assessments they did when you applied for your home loan.
With a HELOC application, each lender will consider your FICO credit score. The results of your credit score will have a big impact on the rate you’re offered. If you’re thinking about getting a HELOC, get a copy of your credit report first. Check to see that everything is correct. You can even take measures to improve your credit rating before you apply for your HELOC.
TIP: A higher credit score means a lower HELOC rate.
Tip 3. Pay Attention to Introductory HELOC Rates
A HELOC often comes with an adjustable rate during the initial draw period that changes along the line with the prime rate.
But a lot of low HELOC rates are meant to get your attention. This means that most HELOC rates you see advertised are introductory rates that may jump in less than 6 months.
Your HELOC rate can only be offered once your application is in progress. So ask about introductory rates and special offers, and ask them to explain the differences before you apply. Find out when and how your rate will change during the draw and repayment periods. Once you decide to apply for a HELOC:
TIP: Ask how long the start rate will last and what your rate will be when that period ends.
Tip 4. Ask About HELOC Rate Caps
Some HELOC offers include what’s known as a rate cap: a literal cap on your rate to safeguard you against inflating interest rates. For most HELOCs, the rate is a fluctuating rate that will stay in sync with the prime rate. When the prime rate increases, your HELOC rate will increase proportionally. When the prime rate goes down, so will your HELOC interest rate.
Since you can draw on your account at your convenience, you can always choose not to draw when rates are high and to access the account when rates are low. But this might not safeguard you if rates jump quickly. A rate cap can protect you if the prime rate jumps quickly.
TIP: As your lender about rate caps and see if this option makes sense for your financial goals.
Tip 5. Check Out Different HELOC Lenders
It’s smart to shop around and pay attention to the rates you see from different lenders: banks, credit unions, mortgage brokers, online lenders and such.
Spending a little time digging around will give you a sense of the average HELOC rates lenders are currently offering. As mentioned above, determine whether the rates are introductory rates or even below-market teaser rates.
Working with a mortgage broker you have a relationship with can save you a lot of time and money. Your mortgage is a serious financial commitment and your HELOC is no different. You’ll be borrowing against one of your biggest assets. Your home.
TIP: Work with someone you trust.
These HELOC tips will help you stay informed and save money.
- Know your credit score
- Find out how much equity you have in your home
- Pay attention to introductory HELOC rates
- Ask about rate caps
- Check out different HELOC lenders
Working with an experienced mortgage broker can make all the difference when you want to get the best HELOC rate. If you’re thinking about applying for a HELOC, give us a call. We can help.