Getting a home equity line of credit or HELOC loan is a popular move in 2017. HELOC rates are 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.
If you want to get the best HELOC rates, 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 interest rate markup will be the same throughout the loan. Verify if the interest rate markup is uniform throughout the entire loan.
#4 Lenders Have Varied Rate Caps
Your HELOC 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
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 HELOC that will not charge you more fees for not using your own equity.
#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 HELOC. 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.
#11 Check Several HELOC Lenders
Don’t always think your first mortgage lender will give you the best rate on your HELOC. 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 2017. 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 a HELOC, you will be able to save yourself a good deal of interest over the life of the loan.