Oct. 26, 2021, 4:47 p.m. EDT

Some HELOC rates start at around 2%. How to get the best rate on a home equity line of credit

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By Lindsay Goldwert

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A house isn’t just a home, it’s also most likely your largest asset. So if you need to pay for certain big expenses in your life, a HELOC may be an option for some homeowners to consider, especially considering that some HELOC rates now start at below 3% (see the best rates you qualify for here, and below) . But they’re not right for everyone.

What is a HELOC?

A HELOC, or home equity line of credit, is a loan in which the borrower receives a line of credit that can be drawn on, as needed, using the equity in a home as collateral. Unlike with home equity loans, borrowers don’t have to take out a big lump sum all at once, and they only pay interest on the amount borrowed.

The benefit of using a HELOC is it allows a borrower to pay for things like home improvements or debt consolidation potentially at a lower interest rate than a high-interest credit card or many personal loans, and you only pay interest on the amount you use. But HELOC rates are often variable, so they could go higher, and because a HELOC uses your home as collateral, you may risk home foreclosure if you don’t keep up with your payments. Think hard about borrowing against your home equity, especially if you’ve worked for many years to build it up. Read more about HELOCs here.

What kind of interest rate can you expect from a HELOC? 

Interest rates are low on HELOCS right now. As of September 2021, the average rate on a $50,000 HELOC was 4.17% assuming an 80% loan-to-value ratio, according to data from S&P Global. That’s roughly the same as it was in August (4.19%) and down from May, when it was 4.27%. Note that you typically will get the best rates if you have a higher credit score (740 and over is a good benchmark) and a loan-to-value ratio (the current loan balance ÷ appraised value of the home = LTV) that is 80% or less. 

While there are some fixed-rate HELOCs, most have variable interest rates, which means that they may go up and down over the life of the loan. At the start, the lower rates may offer lower monthly payments, but it’s important to know over the course of the repayment period, the payments may change or increase.  See the HELOC rates you qualify for here .

A lender may offer a lower introductory rate to entice you to get a HELOC. But note that after your introductory period ends, your rate (and payments) may increase, so make sure you can afford that. 

Where can I get the best rate on a HELOC? 

The best way is to compare rate offerings between various lenders, said Mark Garces, PenFed Mortgage vice president of secondary marketing. You can cmpare HELOC offers here .

When you speak to lenders, you should find out how often and how much your payments can change. One important question to ask is whether you are paying back both principal and interest, or interest only, during different periods of the loan. “Even if you are paying back some principal, ask whether your monthly payments will cover the full amount borrowed or whether you will owe an additional payment of principal at the end of the loan,” the Federal Trade Commission advises. 

When asking about the interest rates around a loan, it’s essential to ask about what repayments can look like, the fees associated with the loan, and all the ways it can impact your monthly finances. You don’t want to get overwhelmed by payments and risk losing your home.

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