Tackling a major kitchen remodel? Want to add a second bathroom to your home? Or maybe itâs time to add that second-floor master bathroom suite that youâve long coveted. A home equity line of credit, better known as a HELOC, can help.
If youâve built equity in your home, you might be able to qualify for a HELOC. And if you do, you can use the money you borrow for whatever you like.
Home equity lines of credit (HELOCs) from Quicken Loans offer homeowners a flexible way to access funds using the equity they’ve built in their home. But like any financial product, it’s important to understand how HELOC rates work so you can make an informed decision. This comprehensive guide will explain common HELOC rate terms, current market rates, and tips for getting the best rate with Quicken Loans.
What is a HELOC?
A HELOC works like a credit card, allowing you to borrow against your home’s equity. With a HELOC, you have an open line of credit up to a certain limit. As you pay down your balance, that available credit comes back for you to use again
Here are some key features of HELOCs:
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You can borrow repeatedly: With a credit card-like structure, you can borrow as many times as needed up to your credit limit.
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You only repay what you use Interest accumulates only on the amount you actually borrow, not the full credit limit
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Uses home equity as collateral: The lender places a second lien on your home, meaning foreclosure is possible if you fail to repay.
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Typically has a variable rate: The interest rate fluctuates based on market conditions.
How Do HELOC Rates Work?
HELOC rates have some unique characteristics compared to rates for other types of loans. Here are the key factors that determine your HELOC rate:
Initial Rate vs Long-Term Rate
Many lenders advertise a low promotional rate for the first 6-12 months of a HELOC. This teaser rate is not the true cost of borrowing, as the rate will adjust to the current market rate after the intro period ends. Expect to pay a higher long-term rate for most of the HELOC’s duration.
Variable Rate Structure
The interest rate on a HELOC varies throughout the loan term. The rate starts at an initial index value and then adjusts periodically based on market changes. Common indexes used include the:
- Prime Rate
- London Interbank Offered Rate (LIBOR)
- 11th District Cost of Funds (COFI)
When the index rises, your HELOC rate increases accordingly. Rate caps limit how much and how frequently your rate can change.
Draw Period vs Repayment Period
HELOCs have a draw period (usually 10 years) where you can access funds, followed by a repayment period where you can no longer draw and must repay the balance.
Rates remain the same during both periods, but keep in mind that payments jump up significantly once the repayment phase starts since you must also repay principal then.
Added Margins
On top of the index rate, lenders charge an additional margin or spread based on creditworthiness. Borrowers with higher credit scores tend to receive lower margins. The total rate = index + margin.
Fees
You’ll pay origination fees and closing costs upfront when taking out a HELOC, including application fees, appraisal fees, and attorney fees. These fees often range from 2-6% of your credit limit.
What Are Current HELOC Rates With Quicken Loans?
HELOC rates vary over time based on economic conditions, so be sure to check Quicken Loans’ current rates. As of February 2023, here are sample rates:
- 5-year variable rate: 7.25%
- 10-year variable rate: 8.00%
- 20-year variable rate: 9.375%
Fixed rate HELOC options are also available:
- 10-year fixed rate: 8.125%
- 15-year fixed rate: 8.25%
- 20-year fixed rate: 8.50%
These rates can fluctuate daily, so reach out to a Quicken Loans loan officer for real-time rate quotes.
Tips for Getting the Best HELOC Rate
While you can’t control index rates, here are some ways to help secure the lowest rate possible for your situation:
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Shop around: Compare rate quotes from multiple lenders as rates and fees vary. Leverage preapprovals to find the best deal.
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Improve your credit score: Generally a credit score above 760 secures better rates. Pay down debts and maintain on-time payments.
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Choose a shorter term: The shorter the HELOC term, the lower the rate tends to be. But balance term length with affordable payments.
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Pay fees upfront: Paying closing costs at closing instead of rolling them into the loan amount avoids extra interest.
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Lower LTV: HELOCs with a loan-to-value ratio below 80% often receive better rates. Making a down payment lowers your LTV.
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Select fixed rate: While less common, fixed rate HELOCs provide rate certainty over the life of the loan.
Compare HELOC rates from multiple lenders to increase your chances of securing the lowest rate for your situation. Preapprovals let you compare real rate offers before formally applying. With knowledge of current market rates and these rate optimization tips, you can feel confident you’re getting the best possible HELOC rate. Reach out to Quicken Loans today to explore available HELOC options.
Start Making Your Payments
Once you borrow against your HELOC, youâll start making monthly payments. During the first several years of your HELOC, the draw period, youâll only pay back the interest on what you borrowed. During the repayment period, youâll pay back interest while also making payments on the principal of what you borrowed, meaning that your monthly payment will increase, usually significantly.
Buy Or Invest In Another Property
You can use the funds from a HELOC to help cover the down payment costs of buying an investment property. The goal is that whatever investment property you buy increases in value and generates income. For example, you might use your HELOC funds to cover the down payment youâd need to buy an apartment building. You can then charge rent to help cover the costs of this new buildingâs mortgage. If the property increases in value, you can eventually sell it for a solid profit.
Just make sure you can afford the new mortgage payment that comes with your investment property and your HELOCâs repayment costs, especially after your HELOC enters its repayment period.
You can use the money from a HELOC to help cover the costs of your childâs college tuition. Be careful, though. You could put your house at risk if you canât afford your monthly HELOC payments. You might consider federal and private student loans instead of a HELOC. Even if you fall behind on these loans, your lender wonât be able to foreclose on your home.
Financial advisors typically recommend that you build an emergency fund with enough money to cover 3 â 6 months of daily living expenses. It can be difficult to gather this much money. You could, though, take out a HELOC and borrow enough from it to build an emergency fund that you could dip into to cover unexpected repairs or expenses. Because HELOC dollars come with lower interest rates, this could make more sense than relying on credit cards to cover emergency expenses.
Again, though, your house acts as collateral with a HELOC. If you fall behind on your monthly payments, your lender could start the foreclosure process. Make sure you can afford your HELOC payments, both during the draw and repayment periods before you use a line of credit to build an emergency fund.
Quicken Loans HELOC Review: Pros and Cons
FAQ
What is the current interest rate for a home equity line?
What is considered a good HELOC rate?
What is a HELOC from Quicken Loans?
What is cheaper home equity loan or line of credit?
What credit score do you need for a home equity loan?
To qualify for a home equity loan or HELOC, you’ll need a minimum credit score of 620-680 for most lenders. However, to qualify for the best rates and terms, you’ll want to have good to excellent credit. Lenders use your credit score to determine how good you are at handling debt.
What is a home equity line of credit?
A home equity line of credit, better known as a HELOC, can help. If you’ve built equity in your home, you might be able to qualify for a HELOC. And if you do, you can use the money you borrow for whatever you like. What is a HELOC and how does it work? Here are the basics. What Is A HELOC?
How much equity does one have in a mortgage?
Equity refers to the difference between what you owe on your mortgage and the current value of your home. For example, if you owe $150,000 on your mortgage loan and your home is worth $200,000, you have $50,000 of equity in your home. Your equity can increase as you pay down your mortgage.
How do I calculate home equity?
To calculate your available home equity, determine the current market value of your home and subtract your total primary mortgage balance and any other debts secured by your property. Other debts secured by your property include second mortgages, home equity loans, or unpaid balances on home equity lines of credit.