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Overview
This article will discuss general rules about Home Equity Line of Credit (HELOC) rates and how they change. To understand your line of credit, refer to your loan agreement and consult you lender or other financial expert to answer any questions you may have.
How home equity line of credit rates are determined
A Home Equity Line of Credit (HELOC) is a line of credit, much like a credit card, that allows you to draw money as you need over the course your draw period, which varies by the loan but is often between 5 to 25 years. A HELOC differs from a home equity loan, which is taken out in a lump sum. Typically, a HELOC has a variable rate that is computed by adding or subtracting a margin from a published rate, often referred to as the index rate.
What is my index rate?
Your loan documents will define specifically what your index rate is. Often, the index rate is the Wall Street Journal Prime Rate. Typically, this rate in the United States is 3 percent or 300 basis points higher than the Fed Funds Rate. Another rate that your loan could be based on is the London Interbank Offered Rate (LIBOR). There are four different LIBOR rates: 1 month, 3 month, 6 month and 1 year rates. Be sure you understand which rate your loan is based on. Bankrate.com publishes these and many other rates.
Does my credit affect the credit rate of my HELOC?
Your credit may change the margin on your rate. The rate that you pay is determined by a base rate plus or minus a margin. For instance, someone with good credit may get a rate 0.5 percent below the prime rate, but someone with bad credit may have to pay several percentage points above the prime rate for the same loan. The better your credit score, the better the rate you will qualify for. But, as with all things, be sure to shop around. Your credit score may get you a better rate at another bank or lending institution.
How often will my rate change?
Review your loan documents. It may vary on a monthly basis, annual basis or any other frequency. It is possible that at the end of your draw period, your rate will convert to a fixed rate. Your loan documents define how your loan functions. If you do not understand your rate, consult your lender or another financial expert.
How do I apply for a HELOC?
Many lending institutions offer HELOCs, including banks and credit unions. As of January 2009, some lending institutions greatly reduced or stopped issuing these loans in light of the recent housing and financial crises. These loans are risky if home values decrease and are much safer when home prices are on the rise. As a result, in the present lending market, banks may be less likely to issue these loans or charge higher interest rates for them.
