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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.
Generally, a good HELOC interest rate is one that falls below the current average HELOC rates. That benchmark can vary depending on the current economic conditions. In October 2023, for example, a good HELOC interest rate could range from 7% to 9%. Lenders may also offer lower 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.
What Is a Good HELOC Rate?
In October 2023, the average HELOC interest rate was around 9%, with some lenders offering rates in the 7% to 9% range.
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. Once the introductory period ends, your rate will change to the lender's standard rate.
Keep in mind, you'll usually need good credit to qualify for the best HELOC rates. Minimum credit score requirements vary by lender, but most want to see a credit score above 680, and some may require a score of 720 or higher for their best interest rates. If your credit is in less-than-stellar shape, the best HELOC rate for you will depend on the rates lenders are willing to offer you.
How Are HELOC Rates Determined?
A good HELOC rate can vary depending on when you look. Because the rates are usually variable―but not always―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.
Lenders also add a fixed margin on top of the prime rate when calculating your interest rate. For instance, if your lender attaches a 1% margin on top of the prime rate, your HELOC rate is considered "prime plus 1%."
Naturally, your creditworthiness, including your credit score and payment history, plays a significant role in calculating your interest rate. Lenders also consider your employment status, the amount of money you're requesting for the line of credit, how your debt obligations compare to your income and other criteria.
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'll likely need a credit score of 680 or higher to qualify for HELOC, although a higher credit score could improve your approval odds and interest rate.
Before you apply, review your credit score and credit report to get an idea of where you stand, whether you need to make improvements and which areas you can address to increase your credit score. By improving your credit, you might secure a lower interest rate and potentially save thousands of dollars in interest.
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.
Increase Your Home Equity
Having sufficient equity is critical to securing a good HELOC rate, which lenders determine by reviewing your combined loan-to-value (CLTV) ratio. This ratio compares the value of your home with the combined total of the loans it secures, including the HELOC you're applying for. Generally, lenders look for a CLTV of 85% or lower, although some lenders allow for higher ratios.
Regardless of your borrowing limit, you may be more at risk of being underwater on your loans if you're borrowing enough to get close to the lender's maximum. 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
As you compare interest rates from various lenders, pay special attention to their closing fees. Typically, closing costs range from 2% to 5% of the line of credit amount, but not every lender charges closing costs.
Remember, the interest rate your lender quotes you when you are shopping for a loan is an introductory rate that is only good for a short period. After that, your HELOC will typically switch to a variable rate that adjusts—usually upward.
Each lender will have different caps on how much the interest rate can go up over time, something to consider when comparing HELOC offers. Lenders with lower rate caps can help you limit your costs regardless of the current interest rate.
Should You Get a HELOC Now?
According to a study of anonymized Experian credit data, many homeowners looking to tap into their home equity are turning from cash-out refinances toward home equity loans and HELOCs. The trend suggests now may be a good time to open a line of credit, compared to the recent past.
Until mortgage rates started to rise in early 2022, cash-out refinances were a popular home equity tool because homeowners could replace their mortgage with a new one with a mortgage rate similar to or below their current rate—usually below 4%. But as mortgage rates climbed significantly in 2022, most homeowners wanted to avoid refinancing into new mortgages with substantially higher rates.
As a result, homeowners began turning to HELOCs and other options to access cash from their homes. HELOC originations spiked from 213,000 in September 2021 to almost 302,000 in September 2022.
Getting a HELOC now may be beneficial in some situations, such as:
- When you want to consolidate high-interest debt: You may save money on interest by using a HELOC to consolidate credit card balances and other high-interest debt. For example, the average interest rate on credit cards was 22.77% as of August 2023, according to the Federal Reserve. By contrast, HELOC interest rates average around 9%, providing you with a substantially cheaper option that could save you money.
- When you want to make substantial repairs or upgrades to your home: A HELOC can help fund a major home improvement project or renovations, which often run into the tens of thousands of dollars. A HELOC may be especially beneficial if the improvements boost your home's value. According to the IRS, you may be eligible to deduct the interest you paid "if the borrowed funds are used to buy, build or substantially improve the taxpayer's home that secures the loan," among other requirements.
- When you need to cover emergency expenses: Most financial experts advise their clients to build an emergency fund that covers three to six months' worth of living expenses. However, that's not feasible for many. If you don't have emergency backup funds, a HELOC could help you pay for a large unexpected expense such as a major car repair or medical bills. Remember, however, that while a HELOC could help you stay afloat temporarily, it could also be risky and lead to serious debt, so make sure you have a solid plan to repay it.
Alternatives to a HELOC
Depending on your situation, you may have several alternatives to consider. Take your time researching and comparing all of your options to determine which one is the best fit for you. 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.
While most HELOCs have variable interest rates, home equity loan rates are typically fixed. Having interest rates and monthly payments that remain the same for the life of the loan could make it easier to budget.
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 in a low-interest-rate environment, but with today's elevated rates, you may face a higher rate and higher payments, which can strain your budget.
Keep in mind, however, a cash-out refinance is secured by your home, meaning you risk foreclosure if you're unable to make your payments. Also, as mentioned above, high rates make this a less viable option for the vast majority of homeowners.
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 with HELOCs, but they're generally fixed. Repayment terms typically range from one to five years.
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. The introductory period could range from six to 21 months, which may give you enough time to repay the debt with no added interest. 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.
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. Use of a sinking fund can be a reliable way to save for a specific financial goal.
Prioritize Your Credit for Good Interest Rates
Improving your credit score before applying for a HELOC or other credit may help you secure more favorable terms like lower interest rates, higher borrowing amounts and reduced fees. Even if you're not planning on opening a credit line anytime soon, maintaining good credit can help ensure you'll qualify for the best rates when you do.
You can start by getting your credit report from Experian for free. You can also request free weekly credit reports from the three major credit bureaus from AnnualCreditReport.com. If necessary, you can make moves to improve your credit, including signing up for Experian Boost®ø. With Experian Boost, you can get credit for the bills you already pay, like your utilities, cellphone and rent.