HELOC Interest Rates Explained


A couple discusses HELOC interest rates with their credit union representative.A home equity line of credit (HELOC) is a popular way to tap into the equity you have in your home to buy something you need. If you are considering a HELOC for a home improvement project, to pay for a wedding, or something else, you may have questions about HELOC interest rates. The following overview can help you make an informed borrowing decision. 

How Are HELOC Interest Rates Determined?

HELOC interest rates are mostly influenced by the prime lending rate. Lenders also add a margin to the prime rate, which is why the rates will vary from one lender to another.

The prime rate is the lowest possible interest rate for borrowing money. It varies because the Federal Reserve makes adjustments to it based on the current status of the economy.

When loaning money, lenders may make adjustments to their margins and offer lower rates to those with higher credit scores or for other reasons.

Do HELOC Rates Change?

Most HELOCs have variable interest rates, which means they do periodically change when the prime rate changes. If the rate increases during the draw period, you will have to pay more interest on the money you borrow.

Whether variable interest rates are a problem depends on how you use a HELOC. Some borrowers, for example, may borrow a small amount, repay it, and then borrow again at a later date. Because they don’t borrow a lot at a time, the interest payments are manageable regardless of the current rate.

How Often Can the Interest Rate Change on a HELOC? 

Due to changes in the prime rate, interest rates for HELOCs can change monthly. When a change occurs, it usually happens at the beginning of a new month.

Will I Receive a HELOC Rate Change Notice?

When you apply for a HELOC, your lender will provide you with a disclosure that explains that the interest rate is variable and that it will change over time. These rate changes are not considered a change in the terms.

When your HELOC interest rate changes, however, the new rate will be disclosed on your monthly statement. You will receive the statement with the new rate information before your next payment is due.

How Do HELOCs Work in Terms of Paying Interest?

A feature of HELOCs that many people like is that you can make interest-only payments on the money you borrow during the draw period. The draw period is the time that the HELOC is active and you can borrow money.

Being able to make interest-only payments can come in handy in some circumstances, like when money is tight. For example, some small businesses use HELOCs to provide them with the extra cash they need to operate during slow seasons. When business picks up again, they are then able to repay the money they borrowed.

An important negative of interest-only payments to consider is that the money you borrow will have to be repaid eventually. If the draw period ends and you still owe money, a balloon payment may be required for the full amount.

Some lenders may also allow you to convert a HELOC into a conventional loan when the draw period ends and repay it over time with a fixed interest rate. It depends on the lender.

Is HELOC Interest Tax-Deductible?

The interest payments you make on a HELOC may be tax-deductible if you are using the borrowed money for a home improvement project. It’s important to keep in mind, however, that the tax code changes every year. Be sure to consult with a tax professional before deducting HELOC interest on your taxes.

How Do I Get the Lowest HELOC Rates?

Perhaps the easiest way to ensure you will get the best possible rate on a HELOC is to go with a lender that is known to offer low rates. Credit unions, like Members Heritage Credit Union, are non-profit organizations. Unlike banks, which are for-profit organizations that must earn a profit for their shareholders, credit unions are primarily concerned with serving their members with the lowest rates and fees possible.

Maintaining good credit is another way to get the lowest HELOC interest rates. Your credit score represents how well you managed your payments in the past, and lenders consider those with high credit scores to be low risk. Because of this, they usually reward those with high credit scores with the best interest rates.

Having plenty of equity in your home before you apply is another way you can lower your interest rate. The more equity you have, the less of a risk you will be to your lender. 

Can You Refinance a HELOC to a Fixed-Rate Loan?

Some lenders will allow you to refinance a HELOC into a loan with a fixed rate. It may be necessary to do this, for example, if the draw period is almost over and there is still a substantial amount of principal that needs to be repaid.

Be sure to talk to your lender to find out what options you have. HELOC refinancing possibilities may include:

  • A personal loan
  • A home equity loan
  • Refinancing your HELOC and mortgage with a new mortgage 

HELOCs with Members Heritage Credit Union

HELOC interest rates aren’t complicated. Although the rates do vary, the changes are easy to manage. New rates will be listed on your monthly statements, which helps with budgeting.

If you are looking for a HELOC with a competitively low rate, Members Heritage Credit Union offers a HELOC that allows you to borrow up to 100% of your loan-to-value ratio. There are no application or processing fees or prepayment penalties. The draw period is seven years and the repayment period is 15 years, which means you don’t have to worry about a balloon payment. 

Check out the following link to learn more about our HELOCs.

Home Equity Lines of Credit

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