Is a HELOC the right option for you?
Home equity line of credit (HELOC) rates have ticked up slightly. Loans with a 20-year repayment period now average 6.66%, according to the latest rates from Bankrate for the week ending May 8th. And for 10-year loans, rates hit 4.24%. You can see the lowest rates you might qualify for here.
All about HELOCs
A HELOC is a revolving line of credit taken out in the form of a loan, based on the equity someone has in their house. HELOCs can be used for a wide range of expenses, including but not limited to home remodel projects, home repairs, unexpected medical bills and other large expenses.
HELOCs are unique in that after the loan has been funded, the borrower can choose how much of the money they want to use and tap the HELOC on an as-needed basis at any point during the typically 10-year draw period of the loan. During the draw period, the borrower is responsible for making interest payments only, but after the draw period ends and the repayment period begins (typically a 20-year period), money can no longer be extracted and the borrower must make principal and interest payments.
It’s common for HELOCs to yield favorable interest rates because lenders (you can see the lowest rates you might qualify for here) are guaranteed collateral in the form of home equity. Because HELOCs offer borrowers flexibility in terms of how they can be used, they’re a popular choice for homeowners who need to pay off high-interest debt, are starting a renovation or have unforeseen expenses. Another reason HELOCs can be appealing is that they often come with variable rates, meaning borrowers may find themselves with lower introductory rates followed by rates that fluctuate over the course of the loan.
As long as you have substantial equity in your home, HELOCs are typically easy to qualify for, but staying on top of interest and principal pays is essential in ensuring a borrower doesn’t default on the loan and subsequently lose their home.
When applying for a HELOC, expect to fork over hundreds of dollars for appraisal fees, application fees, title search fees and more and be sure to take out a big enough loan that you can pay yourself back for these upfront expenses.
Getting a HELOC
Just because you have a sizable amount of equity in your home doesn’t mean you’ll get a whopping loan because lenders like to make sure borrowers maintain a 20% equity stakein their home. If you need more money than a HELOC can provide, it might make sense to consider a loan that doesn’t use home equity as collateral. But, if you’re not sure exactly how much money you’re going to need, taking out a HELOC is a flexible option for taking out money either all at once, or sporadically.
Experts recommend comparison shopping and getting quotes from three to five different lenders before applying for a HELOC — this will ensure you’re getting the best rates and terms possible.