Getting a home equity line of credit or HELOC loan looks to be popular move in 2020. The best HELOC rates are still very reasonable, and property values are appreciating in much of the US. It’s no secret that homeowners have access to many financial benefits such as tax deductions and flexible low interest home equity credit lines that are not available to people that do not own a home. This year we continue to see today’s HELOC interest rates near all-time lows. It makes sense to shop with the best HELOC lenders online now while rates are so low.
Find out why so many new home buyers are shopping the current HELOC Interest Rates this year
If you want to get the best HELOC rates in 2020, we recommend that you take the following actions:
#1 Remember That Low Intro Rates Never Last
It is important to remember that no matter how low that intro rate is on HELOCs you are considering; it always is going to go up. Many home equity loan lenders will offer you a very low introductory rate for the first six months or year of the loan. This is fine, but you should always note that the rate is going to go up significantly in the long term.
Understand how long the introductory rate is going to last. Also know how long you are paying interest only payments on the HELOC. After a term of usually five or 10 years, the draw period ends, and you then need to pay back both principal and interest.
#2 Markups on HELOC Rates Vary Widely
Lenders will tell you that the interest rate on the HELOC is based upon the prime rate. That is true. But there is a lot of wiggle room. Whatever current interest rates are, your HELOC rate can vary a good deal from lender to lender. It largely depends upon how much the specific lender marks up the rate. That margin between the final rate and the government’s rate is the lender’s profit.
For instance, if the current prime rate is 3%, a common markup is 2%. So your rate at the end of the day is 5%. See if you can find a HELOC lender who will charge less of a markup.
#3 Intro Rate Markups Also Can Differ by Home Equity Lenders
The difference between the base index rate and the rate that you are paying is often due to a temporary margin discount. Do not assume that the HELOC interest rate markup will be the same throughout the loan. Verify if the interest rate markup is uniform throughout the entire loan. Always set out to secure the best HELOC rates.
#4 Lenders Have Varied Rate Caps
Your home equity line could start at a very low rate temporarily. But it is critical to understand what the rate cap is on your specific loan. All HELOCs have a rate cap but it can vary a great deal. Many home equity lines can only go up by 1% per year up to a maximum amount. Compare and contrast what the maximum rate is with several HELOC lenders. And let them know that you are shopping around.
#5 Draw Periods Vary
You may pull equity out of your home with an equity-line of credit during the draw period. After the draw period concludes, you cannot pull more money out. The repayment starts at that time. As noted above, draw periods usually are five or 10 years, but definitely verify what it is. Many home owners want a longer draw period with a lower rate for a longer time.
#6 Balloon Payment May Be Needed
To keep your monthly payment low up front, some lenders may build in a large, one time HELOC payment at the end. This will result in much lower payments, but you need to know what you will have to pay at the end of the term. If you don’t have the cash, you may need to do another loan.
#7 Watch for Prepayment Penalties on HELOCs
If you decide to sell the home before you have repaid the loan, you must pay off the HELOC loan. But many mortgage lenders like to pad their profit margin by charging you a hefty prepayment penalty.
You should be looking for a home equity line that does not charge you a prepayment penalty if you need to sell your house before you thought.
#8 What About Inactivity Fees?
What is worse than having to pay another fee because you did not pull out money? Sounds like a crazy idea to us. Apply for a low-rate HELOC that will not charge you more fees for not using your own equity. Make sure you choose a bank that does not charge you fees for not accessing your HELOC line.
#9 Watch Out for Minimum Balances and Withdrawals
If the mortgage lender wants you to have a minimum withdrawal amount, or a minimum amount that can be borrowed, you have lost a good deal of flexibility. You will then be paying interest on draws that you did not need.
#10 Keep Other Debt Low
As always, the best rates go to borrowers with the best credit. Even if you are paying everything on time, remember to keep your credit card balances as low as you can when you are getting a home equity line of credit. This will raise your credit score and will help you to score a lower rate. If you are simply considering a home equity credit line, because you want to consolidate debt carrying a variable interest rate, it may make more sense to choose a fixed equity loan. If you have less than stellar credit, ask about bad credit home equity programs that may be available depending on your compensating factors..
#11 Check Several HELOC Lenders
Don’t always think your first mortgage lender will give you the best HELOC rate. Shop around as the current HELOC rates may vary depending upon who you are speaking with!
We recommend that home owners take advantage of low HELOC interest rates and high property values in 2018. It is hard to say how long the low interest rate environment will continue. It also is unknown if home prices will continue to climb. This is a great time to pull out equity for the things you need in life.
If you remember the above tips when you apply for the best HELOC rates, you will be able to save yourself a good deal of interest over the life of the loan.
When the Rates on a Home Equity Line of Credit Makes Sense
- You want to shorten the life of your HELOC. If you took out a 30-year HELOC and are 15 years away from retirement with 22 years left on your credit line, you might not relish the thought of having to make monthly mortgage payments while on a limited and fixed income. Many people aim to own their home with no mortgage by retirement, and a short-term loan can help you achieve that, despite monthly payments that can be steeper.
- The tax laws on HELOCs are change in 2018. You can no longer write-off the interest on home equity loans and HELOCs. Read more about the changes to the tax deductions on home equity loans.
- You want to change the terms of your HELOC. You might have taken out an adjustable-rate mortgage that had an ultra-low rate that stayed in effect for five years. Why not lock into the best HELOC rates today, while prices are so low? Well, if those five years are up and HELOC interest rates seem to be rising, you might not want to face rising HELOC payments in future years. So, you might refinance to a fixed-rate home equity loan, ending up with payments that might be higher than what you face now but that won’t rise anymore.
How to Avoid Higher Rate on HELOC Loans and Credit Lines This Year
Do you need cash to remodel your home, pay for college education expenses or pay for a healthcare expense? A home equity line of credit or HELOC is a good way of tapping the equity in your home to pay for things you need.
A HELOC works like a credit card; you borrow what you need from the credit line as the needs come up over a period of time. The interest rate is usually much lower than what you find on credit cards, though. That is why millions of homeowners turn to HELOCs to pay down debt and to pay for other things.
The interest rates on most HELOCs track the prime rate, which has been rising this year. As of April 2018, the average $30,000 HELOC rate is 5.92%. This is up considerably from a year ago. The rate will usually stay fixed for a short period and then can go up or down based upon the prime rate or LIBOR.
This can be a concern in a rising interest rate environment, which we seem to be in now. While the interest rate on your HELOC is going to be a lot lower than a credit card (where rates also are rising), it still can be a concern that your HELOC rate could trend higher in the next few years, as high as 6% or even 7%.
To get the best HELOC rate in a rising interest rate environment, keep these things in mind:
#1 Have a High Credit Score
It is smart to pay down as much debt as you can and make your bill payments on time before you get a home equity line of credit. The higher your credit score, the better your rate will be. A person with subpar credit could get a rate well over 6% right now, and that means paying a lot more in interest over time.
#2 Shop HELOC Loans
Do not make the mistake so many do: Just getting a HELOC from the same lender that did your first mortgage. Your lender might give you a good deal, but there is no reason to only get one quote. Most mortgage experts advise getting a HELOC rate quote from large banks, a small community bank and an online lender. Online lenders often have lower overhead costs and they may get you a lower rate. But a local bank or credit union knows your local market and they may have special low rate programs available.
#3 Inquire About Rate Changes and Caps
You may see a very low HELOC rate on one of your quotes, but you need to find out how long that low rate will last and how much it can increase. Most HELOCs have an adjustable rate that adjusts with the prime rate. But some lenders may give you a low fixed rate for 6 months or a year. You should ask all lenders about what the starting rate is, how long it stays fixed, and whether there is a cap limiting how high it can go. If there is no cap on the HELOC rate, you could have a rate eventually that is higher than you can pay. That can cause you to default and lose your home.
During the first stage of your HELOC, you can draw out money and just pay interest on the monthly payment. At the end of the draw period of five or 10 years, you will be required to pay interest and principal. Your payments could increase dramatically in a few years. So, it is important to understand all of the possibilities on rates with the lender you choose. Careful questioning on this and a review of all the disclosure paperwork really could save you big.
#4 Look Out for The Fees!
Do not get blinded by that spectacularly low interest rate and neglect to see the fees that are hiding behind the dazzle. Some lenders make up for the low rate by charging an upfront fee, third party fee, and an annual fee. You also may have to take out a certain amount every year to avoid fees.
#5 Have Enough Equity
The amount of the loan will affect your rate. The more equity in the property, the less likely that you have too much debt on the home. This looks better to the lender and will often get you a lower rate.
To learn how much equity you have, find a good online estimate of your home’s value and subtract the balance you owe on the first mortgage. Most states and lenders allow you to take out up to 80% of that difference. So if you have a home worth $300,000 and a mortgage of $200,000, you have $100,000 in equity. The lender usually will allow you to take out $80,000.
Takeaway on Shopping for the Best HELOC Rates Today
Rates for first and second mortgages are trending higher as the economy is doing better. But home values are going up too, so you could be in good shape to pull a lot of equity out of your home. Just keep the above tips in mind to get the best possible rate on your HELOC.