HELOC rates hit their lowest levels since November. Should you consider a home equity line of credit?

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As home prices rise, exploitable home equity — the amount of equity available to homeowners while maintaining at least 20% of their home’s equity — has hit an all-time high, according to the latest data. from analytics firm Black Knight. Now, the average mortgage holder’s stake is around $178,000, according to the report’s estimates. This has some homeowners wondering if they should take out a home equity line of credit. Here’s what you need to know before you do it.

What are the latest HELOC rates?

Some HELOC rates hit their lowest level since November for the week ending Jan. 9, with an average interest rate of 5.89% for a 20-year repayment period. For loans with a 10-year repayment period, the rate was 5.52%, according to Bankrate’s latest HELOC rate data. Of course, many people will be offered higher rates – especially those with lower credit scores – but others may get a lower one: you can see the rates you might qualify for here.

What is a HELOC and how does a HELOC work?

A home equity line of credit, colloquially known as a HELOC, is a type of loan taken against the available equity in one’s home, in which the lender provides a revolving line of credit that homeowners can use. 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 lump sum of money all at once (if this is your situation, a home equity loan might be better; you can see the home equity loan rates you may be eligible for here) who 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 over the first 10 years,” says Greg McBride. , chief financial analyst at Bankrate. Experts say some of the best uses for a HELOC are for a home improvement project, to pay medical bills, or to consolidate high-interest debt.

HELOCs typically contain drawdown periods during which the borrower is permitted to draw from their line of credit. During the drawing period, which is usually 10 years, the borrower is usually only required to pay interest on the loan; once the drawdown period is over, 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 change from an adjustable rate to a fixed interest rate for an additional fee for a specified period during the loan.

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

How much money can I borrow?

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

What factors determine how much you 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 (the lower the better, with 43% being about the highest acceptable figure); 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 generally 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’ll likely get a better rate,” says Denny Ceizyk, Senior Writer at LendingTree. McBride adds, “Keeping your total borrowing, including your first mortgage and whatever line of credit you seek, at no more than 80% of the home’s value is a common prerequisite for getting the best rates,” he says. .

According to Holden Lewis, real estate and mortgage expert at NerdWallet, the best HELOC rates go to customers with the following characteristics: “Their monthly HELOC payment is automatically debited from another account with the same bank, they have a high credit score ( typically 740 or 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 comparing lenders to find the best rates. Get quotes from 3-5 different lenders and compare not only rates but also terms. Also ask about discounts: Ceizyk says you may be eligible for additional discounts if you link your monthly payment to your checking account or savings account.

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