How Often Do HELOC rates change?
To understand how often the interest rates can change on a HELOC, consider this; interest rates in general change hourly, daily, and weekly based on economics, interest rate decisions made by the Federal Reserve Board, and other factors that affect the index that a particular loan type is tied to.
Home Equity Lines of Credit (HELOCs) typically come with a variable interest rate, which means your re-payments will vary each month not only based on the amount of the loan you have used, but on the interest charged on your outstanding balance.
Read on to learn more about how much HELOC rates change.
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What are HELOCs and how do they work?
A HELOC is a type of secured loan that lets you borrow money as a line of credit. A line of credit limit is determined by the lender based on several factors, including the equity in your home, your property’s fair market value, and your credit score. Generally, the more equity you have, the higher the amount of credit you’ll be approved for.
A secured loan requires the borrower to pledge an asset as collateral to “secure” the loan. With a HELOC, your home is the collateral securing the loan. This means if you fail to repay the loan, the lender can foreclose and take your home.
Getting a HELOC is a straightforward process, and many homeowners benefit greatly from their HELOC. HELOC funds can be used for anything, including making home renovations, paying off high-interest debt, paying for college tuition and even as a down payment on a second home or investment property.
What causes interest rates to change?
Most home equity lines of credit (HELOCs) are tied to the Prime Rate, which most credit unions, banks and other lenders in the United States use as a benchmark for lending and setting interest rates. Fluctuations in the prime rate, up or down, can result in up or down fluctuations in HELOC rate changes.
Each bank sets its own prime rate, which tends to be based on the U.S. prime interest rate that is influenced by the federal funds rate.
When will I be notified of changes to my HELOC rate?
By law, lenders are required to provide disclosures to consumers about the loan they have applied for and are about to accept. Before you sign for your loan, the lender must tell you which financial index your HELOC follows, how often that index changes, and how high it has gone in the past. This information will give you an idea of how often you can expect an interest rate change. The lender must provide a HELOC rate change notice.
How will changes to my HELOC rate affect my monthly payments?
All HELOCS have a “draw period” (typically 10-15 years) and a “repayment period” (typically up to 20 years). During the draw period, you can borrow as much of the funds as you need and re-payments are calculated as “interest only,” meaning you aren’t repaying the principal amount you’ve used. When the draw period ends, the
repayment period begins. Most HELOC interest rates will adjust to a fixed rate and monthly payments will include both principal and interest on the outstanding balance.
HELOC interest rate changes during the draw and repayment periods will affect your monthly payments, as will the total amount of the loan you used.
Is there a cap on how high my HELOC rate can increase?
An interest rate cap limits how high the interest rate can increase over the life of the loan. This cap or ceiling is typically set by the lender. Be sure to ask what the cap is before you sign up for your loan. According to the Consumer Financial Protection Bureau, variable-rate plans secured by a dwelling must, by law, have a cap on how much your interest rate may increase over the life of the plan. Some variable-rate plans limit how much your payment may increase and how low your interest rate may fall if the index drops.
Can I get a fixed-rate HELOC?
A fixed-rate HELOC may start with a variable interest rate which can be converted to a fixed interest rate. The HELOC fixed rate option may be advertised by lenders as a hybrid HELOC because it combines fixed and variable interest rate options. While it is possible to get a fixed-rate HELOC, you may have to start with a variable rate. How and when you can lock in a fixed interest rate or convert to a fixed interest rate depends on the loan conditions specified by the lender.
What's a good interest rate on a HELOC?
With interest rates continually fluctuating, a “good” interest rate is one that you can afford.
How is HELOC interest calculated?
HELOCs typically have a variable interest rate, which is in effect during the “draw period” at the start of the loan. During the draw period, most HELOCs payments are based on interest-only that charged on the amount of the loan used.
HELOC interest is based on several factors, including the Prime Interest Rate, the margin deed by the lender, and the amount of the loan you use which is your loan balance.
What to do if your monthly payment gets too high?
As you use your HELOC, your monthly re-payment will increase as well. HELOCs generally start with a 10-year draw period, during which “interest-only” repayments are required. After the 10-year draw period ends, a repayment period begins which requires payments that include interest and payment of the principal. (Principal is the amount of the loan you borrowed.)
During the repayment period, people may realize they cannot afford the higher principal plus interest payments. If this happens, it’s critical to speak to your lender about options for lowering your payments, so that you do not miss payments or get into financial trouble that would prevent you from paying your other bills.
Here are some options to consider if your monthly payment gets too high:
Convert to a fixed-rate HELOC
. If you already have a variable interest rate HELOC, ask your lender if your rate can be fixed. If your variable rate cannot be converted to a fixed rate, the simplest thing to do is apply for a fixed-rate HELOC with a lender who offers this option. In this case you’ll pay off the existing HELOC using funds from the new loan.
Convert to an installment loan. An installment loan is a type of personal loan that gets repaid to the lender in monthly installments. If you apply for and can get an installment loan, you’ll get a lump sum loan and use that money to make monthly payments on your HELOC or pay-off your HELOC entirely. Before you
attempt to pay-off a HELOC, ask your current lender if paying off a HELOC early is possible. Lenders often charge a prepayment penalty fee to customers who pay off and close a HELOC account before the end of the loan term.
Refinance. Ask your current lender if they offer a fixed-rate or hybrid HELOC. If a variable rate to fixed-rate conversion is allowed, be sure to ask if you will be charged any fees for making this change.
If converting to a fixed rate is not possible, the next best move is to apply for a new fixed-rate HELOC.
Are HELOCs worth it?
Getting a HELOC can provide money to pay for college tuition, medical bills, home improvements, or starting a small business. Using a HELOC to improve your life or financial position is worth it. However, a HELOC requires your home be used as collateral, so it’s important to be certain you can repay the loan in full and on-time. Because a HELOC is a
second mortgage, if the loan is not repaid, the lender can foreclose on your home to recover the value of the money you owe.
If you want money for a vacation or purchase luxury items, then an
unsecured personal loan would be a safer option that doesn’t put your home at risk.
HELOC pros and cons
As with all financial products, there are
HELOC pros and cons. Your unique situation will guide you to which of these are most relevant to you.
Pros
Pay interest on the amount you spend. With a HELOC you only pay interest on the amount you have used. (A
home equity loan charges interest on the full loan amount, whether you use it or not.)
Low or no closing costs. Most lenders charge low or no closing costs.
Low interest rate. HELOCs typically start with a low variable interest rate.
Convert to a fixed-rate loan. When a HELOC’s draw period ends, the loan may be converted to a fixed rate loan.
Tax advantage. HELOC interest may be
tax deductible. According to the IRS, for tax years 2018 through 2025, if home equity loans or lines of credit secured by your main home or second home are used to buy, build, or substantially improve the residence, interest you pay on the borrowed funds is classified as home acquisition debt and may be deductible, subject to certain dollar limitations. However, interest on the same debt used to pay personal living expenses, such as credit card debts, is not deductible. According to the IRS, for tax years 2018 through 2025, if home equity loans or lines of credit secured by your main home or second home are used to buy, build, or substantially improve the residence, interest you pay on the borrowed funds is classified as home acquisition debt and may be deductible, subject to certain dollar limitations. However, interest on the same debt used to pay personal living expenses, such as credit card debts, is not deductible.
Cons
Variable interest rates may rise. Depending on economic factors, a variable rate loan may be beneficial and result in paying less interest. Conversely, you could end up paying more interest if the index tied to the interest rate rises.
Overspending. Having easy access to money makes it tempting to overspend or spend the money on luxury purchases that aren’t necessary. Be sure to use your HELOC for your original intended purpose and make the most of your money by paying down debt or making improvements to increase your home’s value.
Hidden fees. Some lenders, particularly banks, may charge a pre-payment penalty if you pay off your loan before the specified term. Lenders may also charge an annual fee or an inactivity fee if you don’t draw money from your line of credit.
Risk of foreclosure and damaged credit. If you fail to repay the loan, make late payments or are unable to make your first mortgage payments, these events will be reported to the credit bureaus and your credit score will drop. Because a HELOC is secured by the equity in your home, defaulting can result in the lender foreclosing on your home.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit Today!