HELOC rates are falling again, now to their lowest level since September. Should You Consider A Home Equity Line Of Credit?
HELOC rates fell again for a week, reaching their lowest level since September last week, with an average rate of 3.59% for a 10-year repayment period (unchanged from a week earlier) and 5.89% for a 20-year repayment period (down from a week earlier), according to data released Monday by Bankrate, which examined data for the week ending November 28. Sure, many people will get higher interest rates, but others can get far lower rates: some HELOC rates now start below 2% and you will find the rates that qualify you here. But HELOCs aren’t for everyone, and here’s what you need to know before considering one.
What exactly is a HELOC and how does it work?
A home equity line of credit, colloquially known as a HELOC, is a type of loan borrowed against the available equity in your own home, where the lender provides a revolving line of credit to homeowners. Since HELOCs generally have floating rates, the amount you owe during the repayment period will vary depending on the base rate and how it evolves.
These types of loans tend to work well for those who don’t need a lump sum all at once (if this is your situation, a home loan might be better; here are the best home loan rates you can qualify for) and who may be more flexible Need repayment terms. âA home equity line of credit offers the lowest interest rate and the greatest flexibility, both in terms of how you can borrow money on demand rather than all at once, and in terms of repayment terms during the first 10 years,â said Greg McBride, senior financial analyst at Bankrate. Experts say some of the best uses for a home improvement HELOC are to pay for medical expenses or to consolidate high-interest debt.
HELOCs usually contain drawing periods in which the borrower can withdraw from his line of credit. During the drawing period, which is usually 10 years, the borrower usually only has to pay the loan interest; After the withdrawal period has expired, the borrower can no longer use the credit line and must repay the remaining amount of the loan, including repayment and interest. This repayment period is usually 20 years. Note that your HELOC may contain a conversion clause that allows a loan to switch from a floating rate to a fixed rate for an additional fee for a specified period during the loan term.
The main warning with a HELOC is that you are using your home as a security. So if you run into financial trouble and cannot make the payments, your home may be at risk, says Bobbi Rebel, certified financial planner and personal finance expert at Tally. Another thing to keep in mind is the HELOC fees – the upfront cost including an application fee, title search, evaluation, and more can cost hundreds of dollars. So if you are looking for a small loan, there may be a better solution.
How Much Money Can I Borrow?
You need equity in your home to earn a HELOC, and lenders typically allow borrowers to withdraw up to around 85% of the value of their home.
What factors determine how much I pay for a HELOC?
You need things like good credit (the best rates usually go to people with a score of 740 or higher, but you can qualify for a HELOC with a lower score); a fair debt-to-income ratio (the lower the better, with 43% being roughly the highest acceptable number); and an acceptable loan-to-value ratio. To calculate the LTV ratio, divide the amount borrowed by the appraised value of the property. If a home is valued at $ 400,000 and your mortgage balance is $ 140,000, your LTV is 35%.
âA 740 credit score will typically get you the best HELOC rates, although some lenders raise the bar even higher. Although some lenders allow you to borrow up to 85% of the value of your home, you will likely get a better interest rate if you borrow 70% or less, âsays Denny Ceizyk, senior executive at LendingTree. McBride adds, “A common requirement for the best interest rates is that all of your borrowing, including your first mortgage and your desired line of credit, be no more than 80% of the property’s value,” says McBride.
According to Holden Lewis, home and mortgage expert at NerdWallet, the best HELOC plans go to customers with the following characteristics: âYour monthly HELOC payment is automatically debited from another account at the same bank, they have a high credit rating (usually $ 740) or ). higher) and the line of credit is 70% or less of the appraisal of the home, âsays Lewis.
How to get a HELOC
McBride recommends comparative purchases between lenders to find the best rates. Get quotes from 3-5 different lenders and compare not only the prices, but also the terms. Also, ask about discounts: Ceizyk says you may get additional discounts if you tie your monthly payment to your checking or savings account.