HELOC Rates Overview

Many factors affect home equity interest rates, so it is important to shop for a Home Equity line of credit rate.

Here are the details to get the best HELOC rates.

How HELOC Rates Work

HELOCs are adjustable-rate mortgages. HELOC rates can be described as variable-rate mortgages. HELOC lenders will calculate your monthly payment using your current balance and a combination of these two elements to determine your rate.

Your credit score and equity in your home will determine the margin you can get for your HELOC.

When you locate a HELOC lender, they will run one credit report that combines your credit history from all three major credit agencies: Equifax TransUnion, Experian, and TransUnion. The credit report will include all of your credit history and credit scores from each bureau.

Lenders will typically use the middle score of all three scores to qualify you. Some may take the lowest score of any of the three. Your HELOC margin will drop the higher your credit score. You may have a lower margin if you have late payments or other credit problems. This can make it difficult to get a HELOC, depending on how severe your credit history is.

Equity in your home can be calculated by subtracting total outstanding loans from the home's worth. Lenders want to limit the number of loans to 90 percent of your home's worth. Your HELOC margin and the percentage of your home's value will increase the more you have this percentage.

These factors can make your margin as small as zero, but it could also go as high as a few percentage points if you have credit problems and little equity.

HELOC Rates Change with Economic Trends

The Prime rate indexes HELOCs. This is a rate that is tied to the Federal Reserve decision-making.

The Fed meets eight times per year and at other times during crises to discuss the possibility of moving an overnight bank-to-bank lending rate known as the Fed Funds Rate. HELOC rates follow the Fed Funds Rate, which is made up of the Fed Funds and three percent.

Economic conditions determine the movement of Fed and HELOC rates. For example, Fed and HELOC rates are likely to rise if the economy is growing and healthy.

Between the 2008 crisis and December 2015, HELOC and Fed rates were at their lowest point. Prime was 3.25 percent, and Fed Funds was.25 percent. The Fed made that determination, and HELOCs were tied to the Prime Rate.

A HELOC is a rate that moves in the same direction as Prime rates.

Many HELOCs include a cap on the total rate. This means that even if the Prime rate experiences an extreme rise, your rate may not rise as much based upon the terms of your HELOC.

Don't forget to mention that your HELOC rate will be calculated monthly using the Prime Rate at the time and your margin as described above.

HELOC Fixed-Rate Advance Options

HELOCs can be fixed at a specific amount of the balance, even though they are adjustable-rate mortgages.

If you wanted to remodel your bathroom for $25,000, you could either take a fixed-rate advance or draw of that amount. This would fix the rate on that portion of your HELOC. Your HELOC terms would determine the fixed rate.

This feature is useful if you don't plan to repay a certain amount of your HELOC over a longer time. This can help protect you against the Prime Rate rising over this time. However, the fixed-rate advance option rates are more than the sum of your index plus the margin.

Compare HELOC Fees and Rates

After you have found HELOC lenders and requested HELOC rates from these, you will want to compare the following:

• Margin:

  Margin is a factor that lenders may adjust differently depending on your credit score and your equity in your home. This is the single most important determinant of your HELOC rates.

• Rates For Fixed-Rate Advanced Options:

  This is the second most important factor in determining your HELOC rate. Rates can vary between lenders.

• Maximum Lifetime Rate:

  HELOCs will include a provision that states Prime plus Margin must not exceed a specific amount at any point during the HELOC's life. This protection protects you in the event that Prime should spike.

• Interest-Only or Fully Amortized:

  Some HELOCs allow you to pay only the interest on the outstanding balance, while others require you to make principal and interest payments. Lenders that require this may allow you to amortize the payment over 10-20 years. This will increase the amount of the monthly payment.

• Draw Period:

  This is the maximum amount you can draw on your HELOC. It can vary between lenders. If you plan to keep your home and your HELOC for longer, a longer draw period will be better. These periods typically last ten years, and they don't vary much from lender to lender. However, it's worth asking about them.

• Repayment Period:

  This is the time you must pay back the HELOC funds. These are similar to draw periods at 20 years. However, it is worth asking for information to ensure you have the longest time possible -- or enough to allow for your expected time in the house.

• Annual Fees:

  HELOCs work like credit cards in that you can use the funds and then pay them off as you wish. Lenders often charge an annual fee for servicing these loans, as they are more complicated than traditional mortgages. Lenders usually charge similar annual fees, although you can compare them to ensure that no one lender has a significantly higher annual fee.

• Early Termination Fees:

  If you close your HELOC within a specified time, this fee is charged by many HELOC lenders. It is important to compare the fees and the time you have to keep the HELOC open before the fee is waived.