Getty Images
Home equity line of credit (HELOC) rates are lower now than they were when they hit two-year lows in February, averaging 8.04% this week. Low rates on HELOCs make them a more affordable option than home equity loans, personal loans and credit cards. In fact, this week’s average HELOC rate is nearly three times lower than the average rate on credit cards.
Not only are rates low, but home equity levels remain high. A recent report shows that the average homeowner has $313,000 of equity built up in their house.
High equity amounts and low rates make the borrowing environment beneficial for homeowners. HELOCs are a great option to tap that equity — as a line of credit, they allow you to borrow as needed, up to your limit, and, in most cases, make interest-only payments during their draw period. HELOCs also use a variable interest rate, which is an advantage when rates are low like they are now.
If you’re ready to open a HELOC this March, it helps to know how to find the best rate now. Below, we’ll detail what to know.
See how low your HELOC rate could be here.
Three tips for getting the best HELOC rate this March
Ready to get started with a HELOC now that rates are steadily declining? Here’s how to get the best HELOC rate this month:
Pay down low debt balances that have high monthly payments
Debt-to-income ratios (DTIs) are one of the main reasons borrowers aren’t able to get the best HELOC rate or, in some cases, get a HELOC at all, says Nathan Young, founder of mortgage lender North Star Mortgage Network.
To help borrowers improve their DTI, one of Young’s primary strategies is to identify their lowest debt balances that have the highest monthly payments. Eliminating one or two of those balances removes those monthly payments from your DTI calculation and can help you get a better HELOC rate.
“Focusing on the largest payment with smallest balance … not only helps their credit score but their debt to income ratio,” Young says.
While the change to your credit score may only be a few points, Young says, those few points may help carry you to a lower rate.
Explore your HELOC options online now.
Work with a local mortgage broker
Young points out that mortgage brokers work with a network of mortgage wholesale companies that can offer HELOCs at competitive rates, depending on your credit history, DTI and other factors. His company can search HELOCs from 55 different companies, he says. Having that wide range of wholesalers at his disposal helps him find the best rates for clients.
Additionally, he notes, local mortgage brokers may have close connections with underwriters and other key people in the HELOC process that can help solve application and rate issues quicker than if you went through a bigger company and, in some cases, lead to lower rates.
Not only can a local mortgage broker potentially help you quickly resolve issues that block your path to a better rate, but commission percentages at local brokerages may be lower than bigger institutions, which allows a local shop to offer a lower HELOC rate.
Look for lenders that offer lower rates for interest-plus-principal payments or shorter draw periods
HELOCs are split into a draw and a repayment periods. Typically, you make interest-only payments during your draw period. However, some lenders may offer you a lower HELOC rate if you make interest-plus-principal payments on what you borrow during your draw period or choose a HELOC with shorter draw and repayment periods. In both cases, the lender offers lower rates because they’re reducing their risk by getting more money back in a shorter amount of time than if you made interest-only payments over a longer draw period.
The bottom line
Finding the lowest HELOC rates this March will take some work on your part but will be worth it if you can secure a competitive interest rate. A lower interest rate will result in lower interest-only payments during your draw and repayment periods, reducing the chance that you could go into default. If that happens, you may lose your home since you usually have to offer your house as collateral to get a HELOC. So it’s important to shop around to find the best rates and terms for your financial needs first.