Home equity line of credit (HELOC) rates for loans with a 20-year repayment period fell to an average of 5.14%, nearly a full percentage point lower than those rates were in January, according to the latest rates from Bankrate for the week ending April 4. And for 10-year loans, rates held steady at 3.99%. You can see the lowest home equity rates you might qualify for here.
HELOCs: What is a HELOC?
HELOCs allow borrowers to extract money from the equity they have in their home. HELOCs function similarly to credit cards in that the funds are essentially released as a credit line that can be tapped on an as-needed basis.
Instead of presenting a borrower with a one-time lump sum of money, HELOCs give the borrower the ability to borrow small amounts at a time, during the draw period of the loan, which is usually 10 years. During this time, the borrower is only required to make interest payments, but once the draw period comes to an end and the repayment period begins (this is often a roughly 20 year period), the borrower can no longer withdraw funds and they must begin repaying the loan principal in addition to interest.
Because you use your home as collateral for a HELOC, interest rates tend to be more favorable than unsecured loans (you can see the lowest home equity rates you might qualify for here), where lenders charge higher rates to protect themselves from borrowers who may not be able to repay their loan in full. HELOCs can be used for a number of expenditures, including but not limited to home improvement projects, consolidating high yield debt and covering other unexpected expenses.
That said, you want to be sure you don’t default on your HELOC because with your house securing the loan, if you fail to make payments, the lender can come after your home. Additionally, HELOCs can cost hundreds of dollars up front because of fees including appraisal fees, application fees, title search fees and more. HELOCs commonly offer variable interest rates; because of that, they may initially come with lower introductory rates, but be prepared for your payment amount to fluctuate over the life of your loan.
How to get a HELOC
Even though you may have a lot of equity in your home, it’s not necessarily guaranteed that you’ll receive a jumbo line of credit with a HELOC. It’s common for lenders to want borrowers to retain a 20% equity stake in their home, so if the amount of money you need to borrow exceeds this, you may want to consider an alternative. On the other hand, if you’re not sure exactly how much money you’ll need for a specific project, a HELOC can be a wise option because you’re not forced to use the entire loan — you only have to withdraw what you need.
To make sure you’re getting the best rates and terms on a HELOC, experts recommend anywhere from 3 to 5 quotes (look at rates, terms and fees on each), in addition to asking potential lenders about discounts you may qualify for.
