How to Get the Best HELOC Rate

If you plan to borrow against your home equity to fund a large expense, it may be a good idea to apply for a home equity line of credit (HELOC). This form of financing is similar to a credit card in that it gives you a line of credit you can borrow from on an as-needed basis. However, it requires you to use your home as collateral. If you want to get a HELOC, you can use the tips below to get the best possible rate.

How HELOC Rates Work

A HELOC has a variable interest rate. This rate tracks the prime rate, meaning it can fluctuate over the term of your line of credit. Nonetheless, your personal HELOC rate won’t necessarily be the same as the prime rate. It’s the prime rate plus a margin that the lender determines based on the amount of available equity in your home and your credit score. Therefore, if you’re trying to get a HELOC with bad credit, you’ll most likely end up paying a higher interest rate.

How to Get the Best Interest Rate for a HELOC

Looking for a HELOC with a competitive interest rate can be a daunting task, but it’s worth the extra effort because it can help you save substantially over the long run. Follow these tips to score the best HELOC rate:

Maintain a Good Credit Score

As mentioned earlier, your HELOC provider will take your credit score into consideration to determine your interest rate. Therefore, it’s essential that you obtain your credit reports from the three main credit bureaus and check them for errors before you seek a HELOC. Also, make sure you don’t take on new debt or close a credit card just before you apply for a credit line as these moves can lower your credit score.

Have Adequate Equity

The amount of home equity you have not only affects the size of your credit line, but also has an impact on your HELOC rate. Having a large amount of equity means you have a larger stake in your home. This reduces the risk you pose to your lender, which can result in a lower interest rate.

Look for Rate Caps

In some cases, a HELOC may come with a rate cap to provide protection against rising interest rates. By choosing this type of HELOC, you’ll never pay more than your maximum interest rate, even if the prime rate increases significantly.

Choose the Fixed-Rate Option

More and more HELOC providers are offering the option to partially or fully turn the outstanding balance in your credit line into a fixed-rate loan, sometimes without charging a fee. You may want to consider taking up this option to secure a low interest rate so that you won’t have to worry about fluctuations in the market.

Opt for Shorter Draw and Repayment Periods

Many HELOC lenders offer only one set of terms, but others may allow you to choose the lengths of your draw and repayment periods. You may get a lower rate if you opt for shorter terms.

While it’s important, a good interest rate isn’t the only thing you should look for when you’re getting a HELOC. You should also take other factors into consideration, such as maximum loan amounts, repayment terms, fees, and customer service.

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