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HELOC Rates by Month

What is a Home Equity Line of Credit?

Home Equity Line of Credit is a fixed-term revolving line of credit based on your home's available equity (the difference between how much you owe on the mortgage and how much your home is worth). Your home then stands as collateral to secure the line of credit and, although the interest rates are often lower than other forms of credit, typically a HELOC is used for major purchases such as home remodeling, landscaping, medical and education expenses, or to consolidate other debt, rather than day-to-day costs.

How to Read the Average Rate Chart

Like any loan or line of credit, the best time strike is when interest rates are at their lowest because that's when money is "cheapest." With Credit Karma's average rate chart, you can see where rates have been to get a sense of where they might be going. Of course, no one knows exactly where rates will be in the future but keeping an eye on them will make you a much more informed financial planner.

So if the chart shows that rates are on a downward trend, now might be a great time to get started because your monthly finance charge will be lower (depending on your outstanding balance, of course) than if rates were increasing.

Note: If you do decide that now's a good time to open a HELOC, it's important to shop around since different lenders will offer you different rates and include different fees. You can check the daily HELOC comparison of hundreds of lenders here.

HELOC Features

Although similar to a Home Equity Loan in terms of the way you qualify and the up-front costs, the major differences between the two are:

A Home Equity Loan is a set amount paid to you in advance while a HELOC acts much like a credit card, wherein you typically borrow however much you need at any point in time, up to the maximum limit.
HELOCs tend to carry lower interest rates than Home Equity Loans, however it is important to note that most HELOCs carry variable rates while loans are usually fixed. A HELOC carries a variable rate in relation to a specific index, such as the prime rate, so it will almost certainly change over time. The range between your rate and the indexed rate can vary from -1.00% to +4.00% based on the lender, loan to value, credit score, and other market conditions.
Also like a credit card, with a HELOC you can decide more freely how much you want to pay each month. The total outstanding balance will depend on the amount you've spent and the monthly finance charge, but you can choose to pay as little as just the interest or as much as you want. With a Home Equity Loan, your interest has already been factored in over the life of the loan and you pay the same amount each month.

One great way in which a HELOC and a Home Equity Loan are similar, is that the interest on each is generally tax-deductible in the same way your first or second mortgage is. This is something, however, that you'll have to consult a qualified tax advisor about, since conditions vary from lender to lender and state to state.

Benefits

Knowing what a HELOC is and how it works are obviously important, but sometimes it helps to put the financial product into context so that you can see how it might benefit your life. Say you're adding a new room to your house or want to remodel the bathrooms. If you don't know exactly how much everything will cost up front (maybe because you're building it on your own or plan to work with several contractors) then a HELOC could be the perfect option. Need to spend $2,000 this month at The Home Depot? Want to landscape your backyard sometime in the near future but don't know when? Your HELOC is there whenever you need it.

In addition to home improvements, a HELOC is a great choice for helping to fund a child's ongoing education, paying medical/surgical bills, or even taking a big vacation. The interest rate is typically lower than most other forms of credit and the tax advantages could offer a great deal of savings.

Considerations

Of course, every loan product is only good for certain people in certain situations and at certain times. Three major things every home owner should remember when considering a HELOC are:

The penalty for defaulting on a HELOC can be quite substantial, given the fact that your home is being used as collateral. Failure to repay the loan or meet loan requirements may result in foreclosure.
The amount of your HELOC is based on the value of your home. So if that value should decline your available line of credit (max amount) may also decline.
A HELOC carries a variable rate (sometimes even a short-term "teaser rate" to start with) and if market conditions shift and rates go up substantially, your HELOC rate will likely follow suit.

The Federal Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, payment terms, and information about any variable-rate feature. So make sure you carefully read all of the information regarding each of the HELOCs you are considering before you take the plunge.

Where to go for a HELOC

Your bank or credit union may or may not be able to offer you the best rate and terms, even if you have your first mortgage with them, so it's important to compare several options. Click here to view Credit Karma's extensive list of HELOC lenders.

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