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HELOCs are often one of the most affordable loan types for homeowners with substantial equity in their homes — especially compared to personal loans and credit cards. Indeed, you can see average rates here , according to Bankrate, and the site also looks at average rates selected by consumers on its site. Along those lines, home equity line of credit (HELOC) rates for loans with a 10-year repayment period rose to 6.62%, according to Bankrate data from the week ending October 3. Rates on 20-year HELOCs also increased to 7.25%, up from 7.05% the week prior. ( Find the best HELOC rates you may qualify for here .)
But, you do run the risk of losing your home if you don’t repay a HELOC because you’re putting up your home as collateral when you take out the loan. And HELOCs tend to have variable interest rates, so you need to factor fluctating payments — that could increase into your budget.
How HELOCs work
They’re composed of a two-part structure: often a 10-year draw period and a 20-year repayment period that together equal a 30-year term. During the draw period, a borrower can withdraw as much or as little money as they like, but as soon as the repayment period begins, money can no longer be withdrawn. At this point, the borrower must begin to pay back the principal in addition to interest. It’s important to remember that because HELOCs are based on the amount of equity someone has in their home, the amount of money a borrower qualifies for will vary. ( Find the best HELOC rates you may qualify for here .)
Borrowers with higher credit scores, lower debt-to-income (DTI) ratios and substantial equity in their home tend to get the best rates on HELOCs — often with lower interest rates than they’d receive on credit cards or personal loans. To calculate your DTI, add up your monthly bills including your mortgage payment, credit card, child support, insurance, other debts, etc. and divide the total by your gross monthly income. The number that lenders are looking for you to achieve should be 36% or lower. Not only will a number in that range ensure you get approved, it will increase your chances of getting the best rates and terms.
HELOC rates in this article reflect Bankrate’s average rates. A previous version simply referred to them as average rates.