Some HELOC rates start at around 2% right now. What credit score do you need to get the lowest rates?
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Looking to repair your house or consolidate your debt? Some homeowners are now considering getting a home equity line of credit, or HELOC, like some HELOC rates now start at less than 3%. But to get these rates, you will need a certain credit score, as well as other qualifications. Here’s what you need to know.
What is a HELOC?
A HELOC is an indefinite credit line guaranteed by a borrower’s home. HELOCs work the same as credit cards in that you borrow as needed (rather than getting a big lump sum, like you would with a home equity loan), up to a certain limit. .
Their advantages? A HELOC can allow a borrower to pay for large and necessary expenses at a lower interest rate than a high interest credit card or many personal loans. âHELOCs are one of the most flexible borrowing tools, perfect for completing a large home improvement project,â said Russell Randolph, direct consumer lending manager at SunTrust, now Truist. âA borrower does not need to know the final cost of the renovation when they get the line of credit, they can pay the contractors as the work is completed and take every opportunity or change their mind during the project. ”
But while a HELOC can attract with its lower introductory interest rates (some HELOC rates now start at less than 3%) compared to those of a home equity loan, there are a few drawbacks. While home equity loans are likely to be at a fixed rate, most HELOCs have variable interest rates. This means that a borrower’s monthly payment can change during the repayment period, which could lead to sticker shock. This guide will give you more details about HELOCs.
What type of credit score do I need to get a HELOC?
Having a good credit rating shows lenders that you are a responsible borrower who is likely to make payments on time and pay off your debt. And the higher your score, the more likely you will get better deal. Indeed, experts say that many lenders require a credit score of at least 620 to 660 to grant you a HELOC, and a rating of 720 to 740 and above to offer you the most favorable rates and terms. This to guide will help you improve your credit score faster.
What other factors besides the credit score go into the rate you can get on a HELOC?
The good news is that your credit score isn’t the only thing that matters when it comes to getting a lower HELOC rate. The more equity you have in your home (the appraised value of your home minus your remaining mortgage balance), the more flexibility you can have if your credit score needs improvement. Most lenders want to see that you have at least 15-20% equity in your home.
A lender will also look at your debt-to-income ratio, which is a way to compare your monthly income with your monthly debt. They want that ratio to be generally less than 43%, but it varies. Calculate this using this equation: Total monthly debt payments Ã· gross monthly income = DTI.
Your lender can also review your on-time bill payment history. A long history of on-time payments will work in your favor when applying for a HELOC. Transitioning your invoices to automatic payment, even for the minimum amount, can improve the history of late payments and improve your record.