Today’s average HELOC rates are favorable
Home equity line of credit (HELOC) rates tend to be higher than standard mortgage rates. So why are more homeowners choosing HELOCs over cash-out refinances?Check your HELOC rates. Start here
One reason is that HELOCs let you cash out only the amount of equity you need. You don’t have to borrow — and pay interest on — the entire value of your home.
Plus, a HELOC is a credit line you can draw on as needed. And, unlike a cash-out refi, HELOCs are relatively cheap to set up. So a home equity line of credit often costs less than a cash-out mortgage when all’s said and done.
In this article (Skip to...)
- Current HELOC rates
- Best HELOC rates
- How HELOCs work
- HELOC lenders
- How to apply for a HELOC
- HELOC alternatives
Today’s current HELOC rates
Today’s current HELOC rates play a major role for any homeowner or potential homebuyer exploring their borrowing options.
HELOC rates, often fluctuating between 8% and 12%, are influenced by a variety of factors, including decisions made by the Federal Reserve regarding interest rates, the overall economic climate, and your lender’s policies.
For those considering a HELOC, regularly checking these rates is essential, as they can change rapidly in response to economic shifts. On average, home equity line of credit rates will show some variance depending on the loan amount.
- For instance, rates for a credit line amount of $25,000 or $50,000 can be as low as 7.99%, while a credit line of $100,000 has a rate starting at 8.13%.
- On the other hand, a broader survey by Bankrate reports that the average rate on a HELOC was 10.04% in the second quarter of 2023.
It’s always advisable to research and compare rates from multiple lender sources for the most current and applicable rates to your situation.
What is a good HELOC rate?
Home equity line of credit rates are influenced by personal financial factors like your assets, debts, and credit score, as well as broader economic elements beyond your control like the prime rate.Compare HELOC rates from multiple lenders. Start here
Generally, interest rates falling below average HELOC rates are seen as favorable.
In 2022, HELOC rates increased significantly, largely mirroring the Federal Reserve’s adjustments to interest rates—a trend that continued into 2023.
However, it’s common for lenders to offer appealing promotional rates to attract customers. Keep in mind that these introductory rates will likely reset to higher levels after six months to a year, so ensure you’re comfortable with the potential rate increase in the future.
How to get the best HELOC rates
Just like mortgage shopping, the only way to find your lowest HELOC rate is to get quotes from multiple lenders and compare their offers. Look for not only the lowest rate, but the best combination of HELOC interest rates and upfront fees.Check your HELOC rates. Start here
We’d recommend getting HELOC quotes from at least three to five lenders, including your existing bank, your existing mortgage lender, and a variety of other sources like online lenders and credit unions. You can also check out lenders recommended by family, friends, and colleagues.
If you want the best HELOC rates, it also helps to do a financial checkup before you apply. Remember that lenders give the lowest rates to borrowers with good credit and low debt levels.
In particular, try to:
- Improve your credit score
- Reduce your existing debt burden to lower your debt-to-income ratio (DTI)
- Pay down credit card balances. That helps both your FICO score and your DTI
You may not have the time or ability to do any or all of those. But, if you can, you might see worthwhile savings on the HELOC rates and closing costs you’re offered.
Find your lowest HELOC rate. Start here
What is a HELOC?
A HELOC, or home equity line of credit, allows homeowners to convert the equity in their home into accessible cash. This equity, which is the portion of the home you own outright, increases as you pay off your mortgage and as the property’s value rises. With a HELOC, you can transform a part of this equity into a flexible credit line, providing funds that are available for use as needed.
This flexibility makes it a popular choice among homeowners, especially in areas with dynamic real estate markets like New York and Texas. Unlike a fixed-rate home loan or a second mortgage, a HELOC typically comes with a variable rate linked to the prime rate, which can fluctuate alongside mortgage rates and the federal funds rate.
How does a HELOC work?
A HELOC has two main phases: the draw period and the subsequent repayment period. During the draw period, you have the flexibility to borrow funds from your credit line for various needs. Once you enter the repayment period, additional borrowing is no longer possible, and you must start repaying the borrowed amount on a monthly basis.
The draw period is when you can access funds from your HELOC, up to the limit set by your available home equity. Similar to a credit card, you can borrow, repay, and reborrow within this limit.
A typical draw period lasts for about 10 years, although some lenders may offer different durations. During this 10-year draw period, you can make interest-only payments on the amount you withdraw, which doesn’t affect the outstanding balance of the credit line. The principal amount can be deferred until the start of the repayment period.Compare HELOC rates from multiple lenders. Start here
Once the draw period concludes, the repayment period begins. Here, you’re required to pay back the total amount borrowed, plus interest. This repayment typically spans 10 to 20 years and involves fixed monthly installments.
It’s important to note that HELOC rates are variable, meaning both the interest rate and monthly payments might fluctuate over the repayment period, depending on the prevailing rates and the total amount borrowed.
How much does a HELOC cost?
HELOC closing costs typically range from 2% to 5% of the loan’s total amount. It’s wise to budget extra for additional fees for origination, home appraisal, credit report, title search, document preparation, loan recording, and notary fees, along with any annual fees.
However, many lenders offer HELOCs without any closing costs, though they may require the credit line to remain open for a specified duration.
Some HELOCs offer an introductory rate, which can provide a lower interest rate initially. HELOCs may also come with annual maintenance fees, automatic payments options, and potential prepayment penalties.
What should I look for in a HELOC lender?
Choosing the right HELOC lender doesn’t have to take a lot of effort. However when evaluating potential lenders, there are several key factors to consider.Find your lowest HELOC rate. Start here
- Competitive HELOC rates: The HELOC interest rates offered by lenders can significantly impact the overall cost of your loan. Look for competitive home equity line of credit rates and compare them across different lenders. Remember, even a small difference in the interest rate can have a substantial effect on your monthly payments and the total amount paid over the life of the loan.
- Fees: In addition to HELOC rates, be aware of any fees associated with the loan. This can include application fees, origination fees, appraisal fees, closing costs, and annual fees. Some lenders might offer lower interest rates but charge higher fees, so it’s important to consider the total cost.
- Loan terms: Examine the terms of the HELOC, such as the length of the draw period, the repayment period, and any penalties for early repayment. Understanding the terms is essential to ensure they align with your financial plans and borrowing needs.
- Customer service: Quality customer service is important. A lender that offers responsive, helpful support can make borrowing much smoother. Read customer reviews and testimonials to gauge the lender’s reputation for service.
- Flexibility and additional features: Some lenders might offer extra features like the ability to convert a portion of your HELOC to a fixed-rate loan or offer different types of repayment options. Such flexibility can be beneficial, especially with fluctuating HELOC rates.
You might discover that your best rate for a HELOC is available through your current bank or credit union, especially since many financial institutions provide rate discounts to existing customers. Streamlining your loan repayments with the same institution where your checking account or savings accounts are held can be advantageous.
Pros and cons of HELOCs
Home equity loans are a popular borrowing option for homeowners who want to leverage the value of their home to pay for ongoing expenses. And while HELOCs have many benefits, you’ll want to consider its drawbacks before entering the HELOC application process.
Benefits of HELOCs
HELOCs offer a range of advantages that make them an appealing choice for many homeowners. One of the primary benefits is the flexibility they offer in both borrowing and repayment terms. Unlike traditional loans, a HELOC allows you to draw funds as needed up to a certain limit and repay them on a more flexible schedule. This can be particularly advantageous for ongoing projects with fluctuating costs or for managing cash flow if your income is irregular.
Furthermore, HELOC rates are generally lower compared to many other types of loans, making them a cost-effective option for borrowing. Additionally, the interest paid on a HELOC may be tax deductible, especially if used for home improvements, which adds to its appeal as a loan option.
Disadvantages of HELOCs
However, there are also several risks associated with home equity lines of credit that borrowers need to be aware of.
One of the main concerns is the variable nature of HELOC rates. While this can mean lower rates initially, these rates can fluctuate and potentially increase significantly over time, leading to higher monthly payments that may become unmanageable.
Moreover, as a HELOC is secured against your home, there’s a tangible risk of foreclosure if you fail to make payments. This makes it imperative to borrow responsibly and within your means. Another potential downside is the temptation to overspend. The easy access to funds can lead to overborrowing for some individuals, creating a debt that could be challenging to repay, especially if the home’s value decreases or personal financial circumstances change.
How to apply for a HELOC
The HELOC application process involves evaluating your finances and comparing loan options. Key steps include checking your credit, determining your home equity, and understanding terms and rates.Check your HELOC options. Start here
- Assess your personal finances. Check your credit score and report for any errors. Calculate the equity in your home, ensuring you have at least 15-20% equity remaining after borrowing.
- Research and compare multiple lenders. Investigate various lenders to compare HELOC rates, loan terms, fees, and other features.
- Gather necessary documentation. Prepare documents such as proof of income, mortgage statements, home insurance policy, and a recent tax assessment or home appraisal.
- Apply and undergo home appraisal. Submit your HELOC application, which may be followed by a lender-required appraisal to assess your home’s current market value.
- Review loan terms and complete paperwork. After receiving the loan estimate, review all terms carefully, including interest rates and credit limit, and complete any additional required paperwork.
- Close on the HELOC. Understand all terms and conditions thoroughly before closing on the HELOC, which includes signing the final documents and handling any closing costs.
If you’re not sure whether paying variable HELOC rates is best for you, you may find a more suitable loan option in home equity loans, cash-out refinance, or personal loans.
Home equity loans
Home equity loans are a popular alternative to HELOCs. Unlike a HELOC, which provides a revolving credit line, a home equity loan offers a lump-sum payment to the borrower.
This type of loan typically comes with a fixed interest rate, which means your monthly payments remain constant over the life of the loan. This predictability makes budgeting easier. Home equity loans are often used for large, one-time expenses like home renovations or consolidating high-interest debt.Check your home equity loan options. Start here
Home equity loans rates might be slightly higher than those for HELOCs, but they offer the security of a fixed rate. As with HELOCs, your home serves as collateral, so it’s important to consider the risks involved.
Cash-out replaces your existing mortgage with a new home loan for more than you owe on your house. The difference is given to you in cash, which can be used for a variety of purposes, including home improvements, purchasing investment property, or other significant expenses.
This option can be particularly appealing when mortgage rates are lower than current HELOC rates, offering a way to consolidate debt or fund large expenses at a more favorable interest rate.Review your cash-out refinance options. Start here
While cash-out refinancing can offer lower interest rates compared to HELOC rates, it’s important to consider the closing costs associated with refinancing, which can add to the overall expense. Additionally, since this option involves replacing your existing mortgage, your mortgage terms may change, potentially extending the time it takes to pay off your home.
Personal loans are another viable alternative, especially for those who might not have sufficient equity in their homes or prefer not to use their home as collateral. Personal loans are typically unsecured, meaning they don’t require any collateral, but this often results in higher interest rates compared to secured loans like HELOCs or home equity loans.
The advantage of personal loans is their flexibility; they can be used for a variety of purposes, including debt consolidation, home improvement, or even major purchases. The approval and interest rates for personal loans are heavily dependent on your credit score and financial history.
FAQ: HELOC Rates
A HELOC can be a good idea for financing home improvement projects that enhance your home’s value. The flexibility of HELOC rates and the ability to withdraw funds as needed make it ideal for ongoing projects or expenses. However, a HELOC may not be the best option if you lack a steady income or a solid plan to repay the loan. Given that your home serves as collateral, failing to make timely and complete payments on a HELOC could put your home at risk of foreclosure.
HELOC rates mirror the overall interest rate market; they go up when the Fed raises rates. By contrast, a fixed-rate loan keeps the same rate and monthly payment regardless of how the market changes going forward. Compared to personal loans and credit cards, HELOCs offer much lower rates because they’re backed by your home equity.
In today’s market, 3.5% would be an uncommonly good HELOC rate. Since 3.5% would currently fall below the Federal Funds Rate, lenders couldn’t offer this rate on any home loan without losing money.
The monthly payment on a $50,000 HELOC depends on your interest rate and on whether the loan has entered its repayment period. If your rate is 8% and you’re still within a 10-year draw period, your payment would be about $333 a month. Once the loan entered its 10-year repayment period, a $50,000 balance at 8% would require a $607 monthly payment.
Interest paid on a HELOC can sometimes be deducted from your taxable income — but only if you use the borrowed money to buy property or make home improvements (and only when you’re improving the home whose equity is backing the HELOC). To write off interest, you’d need to file IRS 1040 Schedule A, and your total deductions should exceed the standard deduction.
Are you ready to compare HELOC rates?
HELOC rates are generally higher than mortgage rates. But you pay interest only on what you borrow — meaning HELOC payments are often much lower than mortgage payments.
Both mortgage types have pros and cons, so consider your loan options carefully.
Check in with several lenders to learn what HELOC rates you qualify for. You can begin the process by clicking the links below.Time to make a move? Let us find the right mortgage for you