So, you’ve decided to get a home equity line of credit, commonly known as a HELOC. You’re looking forward to getting that revolving line of credit to use as you see fit.
However, you’re also hoping to wind up with a good interest rate. Well, there are acts you can take to help assure that you do end up with one. Keep reading for tips for getting the best HELOC rate.
What is a HELOC?
Essentially, a HELOC is a line of credit that is secured by your home and that you can use however you like.
How Can I Get a Good Rate?
See When Promotional Rate Ends
Lenders often seek to lure new business by dangling a low introductory rate. That’s all good – if you know how long that initial rate will last and what it will be when the introductory period is up.
Be Wary of Margin Discounts
Your margin, which is the difference between the rate you pay and your base index rate, just might be due to a margin discount that at some point will expire. Don’t presume that the interest rate markup is locked in.
Educate Yourself About Markup and Rate Indexes
You might be told by a lender that your rate is based on the prime rate. That is a fact. However, that’s not all it’s based on. More likely, it’s based on the prime rate, or another index, in addition to a markup. Say the prime rate is 3 percent and your markup is 2 percent. Your rate, then, will be 5 percent. Count on always forking over 2 percent over prime.
Know How Long the Draw Period Lasts
It’s during the “draw” phase that you can get cash from your credit line. After that, though, no more cash is available, and the repayment period starts. So, it’s important that you know when the all-important draw period ends.
Seek the Lowest Rate Cap Possible
What you want is a HELOC that has a maximum interest rate cap, either for a period certain or for the life of the loan.
Seek Flexibility
What you don’t want is a lender that sets withdrawal or borrowed balance minimums. Why? Because you’ll lose some of the flexibility that makes HELOCs so attractive. Plus you’ll shell out interest on draws that may be unnecessary.
Learn About Balloon Payments
There are HELOCs that, during the repayment phase, have lower monthly payments, plus a large payment at the term’s end. That big payment is called a “balloon.” This setup may work for you – just don’t forget the due date so that you’re not caught on your heels.
You can get an idea of what kind of payment and rate you can get with a HELOC calculator at Bills.com.
Look Out for Inactivity Fees
Did you know you can be hit with fees for not withdrawing? Well, it’s true. You don’t want to be charged for not doing something. That’s not cool. Avoid such lenders.
Be Wary of Prepayment Penalties
You likely know that if you sell your house, you must clear your HELOC. What you may not know is that some lenders will levy fees if you prepay or cancel your line of credit.
If there’s a chance that you’ll sell your home during the HELOC period, you should avoid HELOCs that have a cancellation or prepayment fee.
If you have a lot of equity in your home, it may be difficult to resist withdrawing the maximum permitted. Exercise restraint and only take the amount needed and that you can afford.
You’ve already decided on a home equity line of credit. You’re halfway home. Now use these HELOC tips to get the best possible interest rate.