Home equity line of credit (HELOC) rates rose slightly this week, with 10-year loan rates hitting 3.99% and 20-year loan rates 6.02%, according to Bankrate’s latest rates for the week ending March 21. You can see the lowest fares you could qualify for here.
The pros and cons of a home equity line of credit
HELOCs allow homeowners to borrow against the equity in their home and receive funds in the form of a line of credit that can be used as needed. The fact that you can use the funds as needed can be a big plus for people doing something like a home renovation and not sure how much money they will need.
HELOCs, which are loans secured by your home, traditionally have favorable interest rates (see the lowest fares you could qualify for here) compared to other types of unsecured loans, and they can be used for a variety of purposes, such as high-interest debt consolidation, home improvement, and unexpected expenses.
Although HELOCs are attractive because of their low rates and flexibility, defaulting on a HELOC can mean the loss of your home. And repayment terms can be complicated and can fluctuate due to their often variable rate nature. (Fixed-rate HELOCs do exist, but they’re just less common.)
Indeed, the repayment of a HELOC works a little differently from other loans. First, HELOCs contain a drawdown period, which is typically a 10-year period during which a borrower can withdraw from their line of credit while paying interest only. After the drawdown period, you can usually no longer use that line of credit and the repayment period begins – a period during which a borrower pays back both principal and interest, likely over a 20-year period.
When taking out a HELOC, it is important to consider that you may not get as much money as you think, as lenders often want borrowers to retain a 20% equity stake. That said, HELOCs are a popular choice for home improvement projects that may require more or less money than originally anticipated, as the borrower can choose how much of the loan they want to use.
How to get a HELOC
Be prepared to share many documents with the lender, who may ask for information such as: property and mortgage information, personal information, employment and income verification, debt and other statuses accounts, insurance statements, etc.
To ensure you get the best HELOC rates and terms, the pros say you should get quotes from about 3-5 different lenders. Another pro tip: ask the lender about any discounts you may be eligible for.