How Does the HELOC Interest Rate Work?

HELOC Interest Rate

HELOC, which stands for a home equity line of credit, is a popular type of second mortgage for homeowners. This second mortgage can be likened to a credit card. With a credit card, you have access to a revolving line of credit, which can be used at any time. The home equity line of credit works in a similar way. Depending on what was negotiated with your HELOC lender, you may have different draw periods to choose from.

The home equity line of credit comes with unique interest rates. The applicable interest rate for this loan can vary case by case. However, the interest rate tends to be favourable to the borrower, making it a popular method of borrowing money for the short term or the long term.

Are you looking to take out a home equity line of credit to use as a second mortgage? Here is how the HELOC interest rate works:

How to qualify for the HELOC

Not everybody can qualify for the HELOC. Lenders will not just approve everyone looking for a home equity line of credit. In fact, there are certain pieces of criteria that need to be fulfilled prior to getting your application ready. For starters, the lender will want to inspect various parts of your financial history. Although the criteria may be different for each borrower, there are some common factors.

Most importantly, the lenders will review your credit history, which needs to be in good standing to have the HELOC approved. Other factors such as your current debt-to-income ratio will be reviewed as well. It is important to get these aspects in good standing first, or else your application won’t be successful.

Variable interest rate

Since there are various interest rates for different individuals, you’ll need to know which rates are applicable to your financial situation. Second mortgages can oftentimes have different types of interest rates applied to the loan. Home equity loans, for example, generally come with a fixed rate of interest.

For a home equity line of credit, these loans come attached with a variable interest rate. This means that the applicable interest rate can fluctuate over time, depending on various market factors. Variable interest rates are usually based on some sort of underlying targets, which range from market to market.

Advantages of variable interest

Interest rates can either make or break a homeowner’s goals, depending on what their goals are at the moment. When it comes to taking out a HELOC, borrowers can rest assured that they are in for certain benefits. For starters, fluctuation is a key factor that can benefit the borrower.

If the aforementioned benchmarks are low, then the borrower’s overall interest rate payments will fall. Lower interest rates can create extremely favourable circumstances for the borrower, especially for repayment purposes. That is why it is vital to discuss this with your lender if you are considering the HELOC.

Selective charging

Another key advantage of seeking out a HELOC has to do with the loan’s basic premise itself. As mentioned previously, a home equity line of credit can be seen as a credit card. The basic function is almost the same, in that you have access to a revolving line of credit for your needs.

This means that every time that you draw from your HELOC, you will only be charged interest on what was drawn. You generally do not have to worry about being charged additional fees on the totality of the loan. Only the money that you use will be subject to interest. That way, you don’t have to stress out over extra fees!

Recommendations

Unless you already know what factors will affect you, a HELOC is generally recommended for potential borrowers. That is mainly due to the fact that some borrowers may not know which loan to go with at the onset.

Since you will only be paying interest on the money that you draw, you won’t have to worry about additional charges. Plus, the flexibility of a HELOC allows you to revise your terms for repayment, as long as you are still in the draw period.

Leave a comment

Your email address will not be published. Required fields are marked *