Owning a home is a huge financial investment. But how can you put that investment to work for you?
If you’re looking for a way to access the money you have invested in your home, a home equity line of credit (HELOC) may be a perfect fit. A HELOC allows you to borrow against the equity in your home. But, as with any loan, there are many things to consider.
Read on to learn more about HELOCs and how to secure the best HELOC rate.
HOW HELOCS WORK
HELOCs differ from other types of loans in one distinct way: you borrow as you go. Instead of borrowing a set amount of funds all at once, you withdraw and repay as needed. A draw period is usually several years.
During your draw period, you can withdraw cash as needed and only pay interest on the loan itself. For example, if you're approved for a $30,000 HELOC, you could withdraw (and pay back) from that $30,000 amount at any time during the withdrawal period.
At the end of the loan, your HELOC will go into a repayment period, which is typically a few years. You no longer withdraw on the loan and instead repay what's owed.
Let's say you borrowed $17,000 of your $30,000 HELOC and already repaid $10,000. You now spend the remaining "repay" period repaying the remaining $7,000 in monthly installments.
UNDERSTANDING INTEREST
HELOCs offer the combination of a low interest rate and the flexibility to borrow how much you need when needed. Keep in mind most HELOC interest rates are variable, meaning they are likely to change over time.
Your interest rate is based on your credit score, debt-to-income (DTI) ratio plus your loan-to-value (LTV) ratio. Having a lower LTV ratio or higher credit score will be most competitive for the best interest rate.
If you’re using a HELOC to pay for improvements to your home, the interest you pay is generally tax-deductible through the mortgage interest deduction. Interest paid on your HELOC for any other purpose, such as buying an investment property or consolidating debt, isn’t tax-deductible.
GETTING THE BEST HELOC RATE
To find the best HELOC rate, be sure to compare multiple lenders — a good tip is to get at least 3 quotes from different lenders to compare rates, fees, and terms. You’ll also want to try improving your credit score, clearing out existing debt, and making extra mortgage payments to increase your home equity.
Commit to shopping around. Research options from big national banks, community banks, credit unions, and online lenders. At Wasatch Peaks, we offer a low introductory rate for 6 months to help you get started while paying much less in interest.
Before applying, make sure you know your current credit standing. Request a free credit report from each of the credit bureaus. Experian, TransUnion, and Equifax all enable you to have one full report every year without any change to your credit score. A higher credit score will help secure the best HELOC rate.
WHAT TO WATCH FOR
When researching how to get the best HELOC rate, you need to keep an eye out for a few things.
Rate Markups
HELOC rates are based on the prime rate. But for your credit line, it’s going to be the prime rate plus a markup — that markup can make a big difference. Assuming that the interest rate markup will always be locked in where it begins can be a costly mistake.
Wasatch Peaks offers a low introductory rate for 6 months. After the initial 6 months, your rate reverts to a competitive variable rate. When you are looking for a HELOC, make sure you know when any introductory rate ends and what happens next.
Prepayment Penalties
Be mindful of prepayment penalties. Suppose you’re suddenly able to pay off your HELOC in a big lump sum. Know before you sign up whether the lender will ding you for getting out early.
Wherever you choose to take out your HELOC (regardless of how much of a line of credit the lender offers) it’s a good idea to only take what you need and can afford.
GETTING THE BEST HELOC RATE AT WASATCH PEAKS CREDIT UNION
HELOCs are a great option if you have sufficient equity in your home since you have the most flexibility in what you borrow and when you’ll pay it off.
But you want to make sure you get the best HELOC rate. Let Wasatch Peaks help you learn more about HELOCs and how to get the best HELOC rate today.
