Key Takeaways
- A first-lien HELOC on a paid-off home serves as the primary and only mortgage, giving you flexible, revolving access to your equity rather than a lump sum.
- Because there's no existing mortgage, the HELOC automatically takes first lien position, which typically means lower interest rates and better terms.
- You can draw funds as needed during the draw period, repay them, and borrow again, but your home serves as collateral.
Your lender says you’re getting a competitive HELOC rate, but how would you actually know? Unlike fixed-rate mortgages where you can easily compare APRs, HELOC pricing involves moving parts that make it harder to tell whether you’re getting a fair deal.
The answer comes down to one number most borrowers overlook: your margin. This guide breaks down how HELOC rates are calculated, what margins are competitive for different credit profiles, and the specific red flags that signal you might be paying too much.
In this article (Skip to...)
- How HELOC rates work
- What margin to expect based on your credit profile
- How to compare HELOC offers the right way
- Questions to ask your lender before accepting a HELOC offer
- Red flags that signal a bad HELOC deal
- Understanding rate caps and floors on your HELOC
- The bottom line
- FAQ
How HELOC rates work
A good HELOC rate generally hovers around or slightly below the current market average, which tends to fall between 7% and 8% for well-qualified borrowers. Rates near or below the average are competitive, while anything significantly higher warrants a closer look. But here’s the thing: you can’t really evaluate your rate without understanding how lenders calculate it in the first place.
See what HELOC rates you qualify for todayEvery HELOC rate follows a simple formula: prime rate plus margin. The prime rate is a publicly published benchmark that moves when the Federal Reserve adjusts interest rates. Your margin is the lender’s markup based on your individual risk profile.
Why does this matter? The prime rate is identical across all lenders, so you can’t negotiate it. The margin, however, varies significantly from one lender to another. That’s where your real opportunity lies.
What the prime rate is and why it matters
The prime rate is a benchmark interest rate that banks use as a starting point for many consumer loans. Most lenders tie their HELOCs to the Wall Street Journal Prime Rate, which is published daily and serves as the industry standard.
When the Federal Reserve raises or lowers interest rates, the prime rate typically moves in the same direction within days. This means your HELOC rate will fluctuate over time, even if your margin stays fixed.
If a lender quotes you a 9% HELOC rate and the prime rate is 7.5%, that likely means you’re paying prime plus a 1.5% margin. Once you know the formula, the math becomes straightforward.
What the margin is and how lenders set it
The margin is the lender’s profit and risk compensation rolled into one number. Unlike the prime rate, your margin is determined by factors specific to you:
- Credit score: Higher scores typically earn lower margins
- Combined loan-to-value ratio: Borrowing less of your available equity reduces lender risk
- Lien position: A first-lien HELOC often carries a lower margin than a second-lien
- Line size: Larger credit lines sometimes qualify for better pricing
Once your HELOC is established, the margin usually stays fixed for the life of the line. So while your rate will move up and down with prime, the margin portion remains constant.
Your HELOC APR = Prime Rate + Margin
What margin to expect based on your credit profile
Knowing the formula is helpful, but you probably want specific numbers. What margin counts as competitive for someone in your situation?
The answer depends primarily on your credit score, though equity and other factors play a role too.
Check your HELOC eligibility. Start hereMargin ranges by credit tier
Here’s a general guide to what borrowers typically see:
| Credit Score | Typical Margin Range | Example Rate (Prime at 7.5%) |
| 740+ (Excellent) | Prime + 0% to 1% | 7.5% to 8.5% |
| 680-739 (Good) | Prime + 1% to 2% | 8.5% to 9.5% |
| 620-679 (Fair) | Prime + 2% to 3%+ | 9.5% to 10.5%+ |
If you have excellent credit and significant equity, you might qualify for prime + 0% at some lenders, particularly credit unions. Borrowers with fair credit often see margins of 2% or higher, and securing a HELOC with bad credit typically means even steeper margins or stricter terms.
Tip: Credit unions frequently offer lower margins than national banks. If you’re eligible to join one, it’s worth getting a quote.
Other factors that affect your margin
Even within the same credit tier, margins can vary based on several additional factors.
- Combined loan-to-value (CLTV): Keeping your total borrowing below 80% of your home’s value often results in better pricing
- Property type: Owner-occupied primary residences get the best rates, while investment properties and second homes typically carry higher margins
- Relationship discounts: Some banks offer margin reductions if you have checking accounts or other products with them
- Autopay enrollment: A small discount, often 0.25%, for setting up automatic payments is common
How to compare HELOC offers the right way
Shopping for a HELOC can feel overwhelming when every lender advertises something different. Some promote low introductory rates. Others highlight no closing costs. A few emphasize fast funding.
The key is knowing what to compare and what to set aside.
Check your HELOC eligibility. Start hereFocus on the margin, not the advertised rate
When you see a HELOC advertised at 6.99%, that number might reflect an introductory teaser rate, the best-case scenario for a borrower with perfect credit, or a rate that requires meeting specific conditions.
Instead of comparing advertised rates, ask each lender: “What is my margin?” Since the prime rate is identical across lenders, the margin is your true apples-to-apples comparison point.
A lender offering prime + 0.5% will always beat a lender offering prime + 1.5%, regardless of what their marketing materials say.
Watch for introductory rates and what happens after
Many lenders offer promotional rates for the first 6 to 12 months. You might see something like “5.99% APR for the first year.”
Teaser rates can be valuable, but only if the fully indexed rate (the rate after the intro period ends) is also competitive. Always ask: “What will my rate be after the introductory period?”
A HELOC with a 5.99% intro rate that jumps to prime + 2% after six months will likely cost more over time than a HELOC with no intro rate but a margin of prime + 0.5%.
Factor in fees and total cost
A slightly higher margin might actually be the better deal if the lender charges no closing costs or annual fees. Conversely, a great margin can be offset by expensive fees.
Ask about these common HELOC costs:
- Origination or application fees: Some lenders charge $0, while others charge $500 or more
- Appraisal fees: Typically $300 to $500, though some lenders waive this cost
- Annual fees: Usually $25 to $100 per year
- Early closure fees: If you close the line within 2 to 3 years, you might owe $300 to $500
- Inactivity fees: Some lenders charge if you don’t use the line
Questions to ask your lender before accepting a HELOC offer
- "What index are you using?" Confirm it’s the WSJ Prime Rate, which is standard.
- "What is my margin, and is it fixed for the life of the HELOC?" The margin portion of your rate typically remains constant.
- "Is this an introductory rate? What will my rate be after the intro period?" Get the fully indexed rate in writing.
- "What is the lifetime cap on my rate?" This is the maximum your rate can ever reach.
- "Are there annual fees, inactivity fees, or early closure penalties?" All of these add to your total cost.
- "Do you offer a fixed-rate draw option?" Some HELOCs let you lock in a fixed rate on portions of your balance, similar to a home equity loan.
- "Are there any discounts I might lose?" Understand conditions like autopay or minimum balance requirements.
Red flags that signal a bad HELOC deal
Not every HELOC offer is worth taking. Watch for the following warning signs:
See what HELOC rates you qualify for today- The lender won't clearly disclose your margin: Transparency matters, and vagueness often hides unfavorable terms
- Your margin is above 3%: Unless your credit is significantly challenged, this is higher than typical
- The margin can change at the lender's discretion: Your margin portion of the rate is typically fixed, not variable
- High upfront fees combined with an above-average margin: You’re paying twice
- Conditional discounts that can disappear: Autopay discounts are fine, but be cautious of complex requirements
- No lifetime cap or an unusually high cap: Caps above 18% offer little protection
Tip: Get quotes from at least three lenders to establish a baseline. If one offer looks dramatically different from the others, dig deeper before committing.
Understanding rate caps and floors on your HELOC
Your rate today might be competitive, but what about five years from now? Rate caps and floors determine how much your rate can change over time.
See what HELOC rates you qualify for todayLifetime caps and why they matter
Every HELOC has a maximum rate ceiling, often around 18%. This is the highest your rate can ever go, regardless of how high the prime rate climbs.
A lower cap, say 12% to 15%, provides better protection if rates spike significantly. While hitting these caps might seem unlikely, borrowers who opened HELOCs in 2020 at around 4% saw their rates more than double within a few years as the Federal Reserve raised rates, leading many to explore HELOC refinance options.
Rate floors and periodic caps
Some HELOCs also have rate floors, which set a minimum rate even if prime drops substantially. If your HELOC has a 5% floor and prime falls to 4%, you’d still pay 5%.
Periodic caps limit how much your rate can change at each adjustment. A HELOC with a 2% periodic cap can only increase by 2 percentage points per adjustment period, even if prime jumps more than that.
Rate floors and periodic caps are often buried in the fine print but can significantly affect your long-term costs.
The bottom line
A “good” HELOC rate comes down to three things: a competitive margin for your credit profile, transparent terms, and reasonable fees. Now that you understand the prime-plus-margin formula, you can evaluate any offer by focusing on what actually matters.
For borrowers with strong credit and solid equity, aim for a margin at or below prime + 1%. Get quotes from multiple lenders, ask the right questions, and don’t let flashy introductory rates distract you from the fully indexed rate you’ll pay long-term.
The margin is negotiable. If you have competing offers, use them as leverage. Lenders want your business, and a well-informed borrower is in a strong position to get better terms.
FAQ on how to tell if your HELOC rate is good
Time to make a move? Let us find the right mortgage for youFor borrowers with credit scores above 740 and at least 20% equity, a competitive margin is typically prime + 0% to 1%. Borrowers with good credit (680-739) often see margins of prime + 1% to 2%. Credit unions frequently offer lower margins than national banks, so they're worth checking if you're eligible to join one.
Yes, the margin is negotiable. Lenders have flexibility, especially for borrowers with strong credit, significant equity, or competing offers from other institutions. If you've received a better quote elsewhere, mention it. Many lenders will match or beat a competitor's margin to win your business.
Introductory rates can provide real savings, but only if the fully indexed rate after the intro period is also competitive. A 5.99% teaser rate that jumps to prime + 2.5% after six months will likely cost more over time than a HELOC with no intro rate but a margin of prime + 0.5%. Always ask what your rate will be after the promotional period ends.
HELOC rates typically adjust monthly or quarterly as the prime rate changes. Your margin stays fixed, but the prime rate portion moves with Federal Reserve policy decisions. Check your HELOC agreement for the specific adjustment schedule, and remember that rate changes can happen quickly when the Fed acts.
