Thinking of doing a home renovation or looking to consolidate debt at a lower interest rate? These are two of the major reasons many Americans are looking to get a a home equity line of credit, or HELOC. A HELOC is a type of loan borrowed against the available equity in your home, in which the lender provides a revolving line of credit for homeowners to use. And in part because many Americans can get HELOC rates lower than they might find with a personal loan or a credit card, they’re a popular option right now. (See the best HELOC rates you can get here.)
HELOC rates for loans with a 20-year repayment period decreased to 7.84%, down from 7.91% the week prior, according to Bankrate data from the week ending January 30. Meanwhile, those with a 10-year repayment period rose to 7.39%, up from 7.37% the week prior, and 30-year HELOCs remained at 6.79% for the fourth straight week.
But before you opt for a HELOC, consider a few caveats. HELOCs aren’t risk-free and defaulting on one can have serious consequences, like losing your home. What’s more, HELOC rates are variable, so you will need to budget accordingly.
You also need to understand how HELOCs work. HELOCs are composed of a two-part structure, typically a 10-year draw period and a 20-year repayment period that together equal a 30-year term. During the draw period, a borrower can withdraw upon any amount of the money available to them, but once the draw period ends and the repayment period begins, money can no longer be withdrawn and the borrower must begin to pay back the principal in addition to interest. For anyone who finds themself in a tough financial position when full repayment is due, the total monthly payment of interest plus principal can be a steep hill to climb.
Note too that the amount of money someone qualifies to receive from a HELOC depends in part on the amount of equity they have in their home. See the best HELOC rates you can get here.
To get the best rates on HELOCs will require you to have a good or excellent credit score, low debt-to-income (DTI) ratio and substantial equity in your home. To calculate your DTI, add up your monthly costs including your mortgage payment, credit card, child support, insurance, other debts, etc. and divide the total by your gross monthly income. You also need to shop around for multiple lenders. This MarketWatch Picks guide offers more helpful hints for getting a low rate on a HELOC.
The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.