What is the APR on a HELOC?
What is the APR on a home equity line of credit (HELOC)?
The loan terms associated with HELOCs vary from lender to lender. The interest rate is adjustable, so it can fluctuate if the prime rate changes; it is important for borrowers to make sure that they understand the terms of their agreement before signing. Most lenders also require an annual fee for HEL
Key Overview: HELOC APR
Home equity line of credit (HELOC) APR fluctuates based on market conditions and the borrowers credit score
It can include fixed-rate or variable-rate interest, depending on the lender
HELOC APR is tied to a prime index interest rate and will be determined using the current market rate in addition to your credit score and a bank margin
HELOC interest rates are significantly lower than those of personal loans, credit cards, and other forms of unsecured borrowing
What is a HELOC?
If you're looking for a way to manage your finances, a HELOC could be a smart tool. It gives you access to cash at a lower interest rate than unsecured loans or credit cards. Basically, a HELOC uses the equity you've built up in your home as collateral on your credit line. And the best part? You get flexible borrowing and repayment terms.
A HELOC is like a credit card, not a traditional home equity loan. Your lender gives you a credit limit and you can withdraw funds as needed. You can do this with a bank withdrawal, check, atm card, or EFT. Only taking what you need will help keep the interest charged low, since you won't be paying interest on the full amount.
Unlike a traditional home equity loan, a HELOC is divided into two distinct phases: the draw period and the repayment period. The draw period begins at the start of the loan and can vary in length depending on your loan terms. Most often it lasts from 5-10 years. During this time, borrowers can make draws from the credit line. Often minimum payments during this time are only required to cover the interest accruing on the loan balance.
The repayment phase often lasts 10-20 years when the outstanding principle balance is paid off. You can no longer withdraw cash from the credit line during this period unless you renew your HELOC with the lender.
What are HELOC APRs?
HELOC APRs are indexed based on the federal prime rate and are determined based on the borrower's credit score, debt-to-income ratio, and credit history. Because a HELOC is a secured loan, the interest rate will always be lower than that of unsecured debt, such as credit cards and personal loans.
Lenders determine HELOC APRs using a prime index rate as a guide. In the United States, this is usually the federal funds rate set by the Federal Reserve, and this can rise and fall depending on when and how the Fed adjusts the rate. Currently, rates are on an upswing due to inflationary concerns in the market.
Bank Rate conducted a national survey that collects rate information from the ten largest banks and thrifts in the ten most populous U.S. cities, using a loan or line amount of $30,000, with a FICO score of 700 and a combined loan-to-value ratio of 80 percent to calculate these rates. It should also be noted that these APRs are current as of May 24th, 2023 and vary depending on an individual's credit score and other factors such as whether they already bank with one of these financial institutions or choose to enroll in autopayment options. Therefore, it is important to research different lenders for the best possible rate for HELOCs when planning for improvements to your home or any other large project involving home equity loans.
To determine your interest rate, lenders usually add a margin on top of the index rate. This margin remains fixed throughout the life of your HELOC. If your bank adds a 1% margin above the prime rate, your HELOC has a "prime plus 1%" interest rate.
HELOC interest can be variable or fixed rate. With a fixed-rate HELOC, the interest rate stays the same for the entire loan. On the other hand, a variable-rate HELOC has an interest rate that can change based on market conditions. While variable-rate HELOCs may start with a lower interest rate, it's important to keep in mind that they can increase over time.
APR versus interest rate
The terms interest rate and APR are often used interchangeably but have some crucial differences. The interest rate is what will be charged against the principal balance on the loan, without the inclusion of other fees or charges from the lender. The interest rate is generally pinned to the federal funds rate, as described above.
APR (annual percentage point) gives you a better picture of your loan costs over time, because, in addition to interest rate, it includes other costs and fees added in by your lender. It will almost always be higher than the interest rate because the lender or bank will need to add charges to cover the costs of servicing your loan.
How is HELOC interest charged?
Interest on a HELOC is generally calculated monthly. The lender will take the outstanding loan amount at the end of each month and multiply it by the interest rate that applies to your loan, then divide that amount by 12. For example, the outstanding balance on your HELOC is $50,000 and your interest rate is 7%, the calculation for interest in a given month would be ($50,000 x 0.07) ÷ 12, or a monthly payment of $291.67 in interest.
When researching various home equity lines, make sure to ask if the lender has a rate cap, which is a limit for how high your interest rate can go over time, as well as how large of an increase can be made at a time. Having a rate cap on your HELOC can provide peace of mind by ensuring that your payments won’t increase too drastically. Your rate cap will depend on several factors, including the lender and the size of the loan.
In many cases, potential borrowers can take advantage of longer introductory rate periods with lower interest rates at the beginning of their loan agreement. While this time frame does vary from one lending institution to another, the margin tends to increase when searching for a longer period and could potentially save even more money in the long run than simply borrowing against their home's value. It’s imperative that borrowers find the longest introductory period possible in order to maximize their savings over time.
Fixed versus variable rate HELOCs
If you're considering a HELOC, it's important to know about fixed- and variable-rate options. With a fixed-rate HELOC, your interest rate stays the same for the whole loan. On the other hand, variable-rate HELOCs can change based on market conditions. They might start with a lower interest rate than fixed-rate options, but that rate could go up over time.
If you want to budget and repay consistently, fixed interest rate HELOCs might be your best bet, such as that offered by Figure. However, if you want to save money over the loan's lifetime, variable interest rate options typically have lower rates initially. Keep in mind that market conditions can cause interest rates to rise with variable-rate HELOCs, so be ready for possible rate increases.
How to get a good APR on a HELOC?
Factors that influence the APR you are offered include your credit score, income, debt-to-income ratio, and payment history. Lenders will review your credit score and history to determine your ability to pay back HELOC funds. The less risk they perceive in lending to you, the lower your APR will be.
To get approved for a Home Equity Line of Credit (HELOC), your credit score should be in the mid-to-high 600s, but having a score of 700 or higher is even better. This will qualify you for a better interest rate and ultimately save you money over time.
At Figure, the maximum amount of credit you can receive is based on your credit score:
FICO Score of 640-679, maximum loan of $125,000
FICO Score of 680-699, maximum loan of $200,000
FICO Score of 700-739, maximum loan of $250,000
FICO Score of 740-759, maximum loan of $350,000
FICO Score of 760+, maximum loan of $400,000
Which HELOCs offer the best interest rate?
When comparing multiple HELOC offers, it is important to take into account the interest rate of each offer. A lower interest rate will usually result in you having to pay less on a monthly basis, and can save you money over the life of your loan. You should also consider the other costs associated with taking out a HELOC, such as annual fees, closing costs and other one-time payment fees that may be charged. Additionally, it is worth looking at how much flexibility each lender offers on their terms and conditions. Does one provide flexible repayment options or fixed pay off periods?1 All these details can affect the cost so it's important to thoroughly assess all aspects for each offer before making a decision.
Figure offers a flexible, fixed-rate HELOC with competitive interest rates and low fees. Because Figure is both a financial lender and a technology company, we have found ways to use big data sets to reduce overhead costs. We pass on those savings to the consumer, making it a more affordable loan with lower monthly payments overall compared with those from traditional banks. Thanks to technology, we also are able to provide fast HELOC approval, in as little as five days. We use data analysis to appraise your home and paint a clear picture of your credit and income, avoiding delays to process paperwork.
Do HELOCs offer points?
Mortgage points, or mortgage discount points are a way for borrowers to reduce the interest they pay on a mortgage for a set fee. Unlike with a primary mortgage, lenders do not generally offer discount points on HELOCs.
When it comes to choosing a HELOC, it is important to consider factors like the interest rate, fees, and repayment options. If you can get approved for a Home Equity Line of Credit (HELOC) with a good credit score, you will qualify for better interest rates and potentially save money in the long run. It is also worth shopping around to compare different offers from lenders such as Figure, who offer competitive interest rates and low fees.