HELOC rates hit their lowest level since September. Should you consider one now?

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HELOC rates hit their lowest level since September last week, with an average interest rate of 3.59% for a 10-year repayment period and 5.90% for a 20-year repayment period, according to data released Monday by Bankrate, which examined data for the week ending November 21. Sure, some people will get higher rates, but others may get much lower rates: some HELOC rates now start below 2%, and you can find the rates you qualify for here. But these are not for everyone. Here’s what you need to know.

What is a HELOC and how does it work?

A home equity line of credit, colloquially known as HELOC, is a type of loan borrowed against the available equity of the home, in which the lender provides a revolving line of credit to homeowners. Since HELOCs generally have variable interest rates, the amount you owe during the repayment period will vary depending on the base interest rates and their trend.

These types of loans tend to work well for those who don’t need a sum of money all at once (if this is your case, a home equity loan might be better; find the best rates. home equity loans you can claim here) and may need more flexible repayment terms. “A home equity line of credit offers the lowest interest rate and the most flexibility, both in terms of the ability to borrow money as needed rather than all at once, and flexibility in repayment terms in the first 10 years, ”says Greg McBride. , Chief Financial Analyst at Bankrate. Experts say some of the best uses of a HELOC are for a home improvement project, to pay for medical bills, or to consolidate high interest debt.

HELOCs typically contain drawdown periods during which the borrower is allowed to withdraw their line of credit. During the drawdown period, which is usually 10 years, the borrower is usually only required to pay interest on the loan; Once the drawdown period ends, the borrower can no longer use the line of credit and must repay the loan balance, including principal and interest. This repayment period usually lasts 20 years. Note that your HELOC may contain a conversion clause, which allows a loan to go from a variable rate to a fixed interest rate for an additional fee for a specified period during the loan.

The main caveat with a HELOC is that you are using your home as collateral, so if you run into financial trouble and can’t make payments, your home may be in jeopardy, says Bobbi Rebell, Certified Financial Planner and Personal Finance. expert at Tally. Another thing to keep in mind is the HELOC fees – the upfront fees including application fees, title search, assessment, and more can run into the hundreds of dollars, so if you’re looking for a small one. ready, there may be a better solution.

How much money can I borrow?

You’ll need the equity in your home to get a HELOC, and lenders typically allow borrowers to withdraw up to about 85% of their home’s value.

What factors determine how much I will pay for a HELOC?

You need things like a good credit score (the best rates usually go to people with a score of 740 or higher, but you can qualify for a HELOC with a lower score); a reasonable debt-to-income ratio (lower is better, 43% being roughly the highest acceptable number); and an acceptable loan-to-value ratio. To calculate the LTV ratio, divide the amount borrowed by the appraised value of the property. If a home is valued at $ 400,000 and your mortgage balance is $ 140,000, your LTV is 35%.

“A credit score of 740 will usually get you the best HELOC rates, although some lenders set the bar even higher. Although some lenders allow you to borrow up to 85% of the value of your home, if you borrow 70% or less, you will likely get a better rate, ”says Denny Ceizyk, editor at LendingTree. McBride adds, “Keeping your total loan amount, including your first mortgage and the line of credit you’re looking for, at a maximum of 80% of the home’s value is a common prerequisite for the best rates,” explains McBride.

According to Holden Lewis, real estate and mortgage expert at NerdWallet, the best HELOC rates go to clients with the following characteristics: “Their monthly HELOC payment is automatically debited from another account at the same bank, they have a high credit rating ( usually higher) and the line of credit is 70% or less of the appraised value of the home, ”says Lewis.

How to get a HELOC

McBride recommends making comparisons between lenders to find the best rates. Get quotes from 3 to 5 different lenders and compare not only the rates, but also the terms. Also ask about discounts: Ceizyk says you might get additional discounts if you tie your monthly payment to your checking or savings account.

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