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A home equity line of credit (HELOC) allows homeowners to tap the equity in their home in the form of a revolving credit line, similar to a credit card.
What's considered a good HELOC interest rate can vary depending on the current economic conditions. In November 2022, for instance, some lenders are offering rates in the 6% to 7% range, but others may go lower with introductory rates to attract more borrowers.
If you're considering a HELOC, here's how to know if the rate you're getting is a good one.
How Does a HELOC Work?
Unlike a home equity loan, which provides you with a lump-sum disbursement that you'll pay back over a fixed period of time, a HELOC has two separate stages:
- Draw period: During this time, which can last up to 10 years, you can take draws from your line of credit as needed. You can only borrow up to the limit, similar to a credit card, but you typically only have to pay interest during this time unless you want to pay more.
- Repayment period: Once the draw period ends, the repayment period begins. During this time, your remaining balance at the end of the draw period will be amortized over a fixed term, which can be as long as 20 years, during which time you'll make regular monthly payments.
HELOCs typically have variable interest rates, which means that your rate will fluctuate over time. However, some lenders may allow you to convert some or all of your HELOC balance to a fixed interest rate and a fixed repayment term, even while you're still in your draw period. They may also come with upfront closing costs and annual fees.
What Is a Good HELOC Rate?
A good HELOC rate can vary depending on when you look. Because the rates are variable, they're largely dependent on the prime rate. When the Federal Reserve raises or lowers its federal funds rate, lenders typically follow by raising or lowering their prime rate.
In October 2022, it's possible to find a HELOC with a rate of around 6% or 7% if you have good or excellent credit.
Some lenders may offer rates lower than that, but you'll want to read the fine print to determine whether it's an introductory rate or a standard rate. If it's introductory, you may only get that rate for a handful of months, after which it'll change to the lender's standard rate.
How to Get a Good HELOC Rate
HELOC interest rates depend on a variety of factors, so it's important to consider what you can do to ensure you get the best offer available to you.
One of the best things you can do to qualify for a lower rate is to compare offers from multiple lenders. Each lender has its own criteria for determining its rates, so even though your creditworthiness remains the same, you may get a wide range of offers.
Improve Your Credit
You can get approved for a HELOC with a credit score as low as 620 with some lenders—others may have higher minimums—but their best interest rates are typically reserved for borrowers with high credit scores.
Reduce Your Debt-to-Income Ratio
The percentage of your gross monthly income that goes toward debt payments is another crucial factor lenders consider when calculating interest rates. Your debt-to-income ratio (DTI) should generally be below 43%, but the lower it is, the better. The primary ways to reduce your DTI are paying down debt and increasing your income.
Have Enough Equity
Lenders typically prefer that you have a combined loan-to-value ratio (CLTV)—the sum of your primary mortgage and second mortgage divided by the value of your property—of 85% or lower, but some lenders may go higher than that.
Regardless of the limit, if you're borrowing enough to get close to the lender's maximum, you may be more at risk of being underwater on your loans if the value of your home drops. To compensate for that risk, lenders may charge a higher interest rate. In contrast, if you have a lot of equity and you're borrowing well below the lender's CLTV limit, it could help you secure a lower rate.
Review Fees and Rate Caps
While one lender may charge a lower rate, it may make up for it with costly closing fees, so make sure you compare more than just the interest rate. Additionally, each lender will have different caps on how much the interest rate can go up over time. Lenders with lower rate caps can help you limit your costs regardless of what the current interest rate is.
Alternatives to a HELOC
Depending on your situation, you may have several alternatives to consider. Here are just a handful of options:
- Home equity loan: If you need money now but don't anticipate needing regular access to a line of credit, an installment loan like a home equity loan can be worth considering. These loans also use your home's equity as collateral and may charge closing costs, but they can also offer repayment terms of up to 30 years and relatively low interest rates.
- Cash-out refinance: Instead of taking out a second mortgage loan, a cash-out refinance allows you to replace your current loan with a new, higher loan. Any amount in excess of your current loan balance is disbursed to you in cash. This can be a good option if you can qualify for a better interest rate on the new loan than what you're paying on your current one.
- Personal loan: If you don't need to borrow a lot, a personal loan could be a worthy option because there's no risk of losing your home if you can't keep up with your payments. Interest rates are higher compared to HELOCs, but they're generally fixed. Repayment terms typically range from one to seven years.
- Credit card: If you have relatively small expenses and can qualify for an intro 0% APR credit card, you could save hundreds of dollars in interest and avoid long-term interest costs. Just be sure to avoid carrying a balance on a credit card if there's no promotional APR, as interest rates can be much higher than most other HELOC alternatives.
- Savings: If you don't want to borrow money at all, you may consider creating a savings goal and working toward it instead. This can take longer, but if your top priority is avoiding debt, it's a good option that will save you money.
Take your time researching and comparing all of your options to determine which one is the best fit for you.
Prioritize Maintaining Good Credit
It's a good idea to evaluate your credit history and make improvements before applying for a loan or credit card, but staying vigilant even when you don't need it can help ensure that you're always ready to qualify for the best rates.
With Experian's credit monitoring service, you'll get free access to your Experian credit report and credit score. Additionally, you'll get real-time alerts when changes are made to your Experian credit report, so you can track your progress and make adjustments quickly if something goes wrong.