HELOC rates: What homeowners should know

When you're considering a home equity line of credit (HELOC), you want to get the biggest bang for your buck, so it's crucial to understand HELOC rates. They shape the total cost of borrowing against your home as well as your monthly payments.

The exact rate you're offered—and how it could change during your loan—will vary based on a number of factors, from the market to your loan terms to your own qualifications. Here's how HELOC rates are built, what moves them, and how to position yourself for a competitive offer.

How HELOC rates work

HELOC interest rates are generally set based on two things: 

1. The prime rate. The prime rate is a benchmark that major U.S. banks set based on the federal funds rate—a rate that commercial banks use when lending money to each other. The prime rate typically sits about three percentage points above the federal funds rate.

2. The lender's margin. The margin is the lender's markup, or what they add on top of the prime rate. Margins are usually based on how the lender assesses your risk profile, including your credit, income, and equity.

Here's how the two parts could add up to form a rate offer:

Most HELOCs have variable interest rates. This means the rate could go up or down whenever the prime rate changes. Some lenders, like Achieve Loans, offer a fixed-rate HELOC instead. A fixed-rate HELOC would have the same interest rate from start to finish.

What determines your HELOC rate?

Each lender has its own specific metrics to setting your HELOC rate, though most look at the same set of factors. If you're also weighing a home equity loan, the same DTI and credit score considerations apply.

Credit score

Borrowers with higher credit scores typically receive lower HELOC rates. Lenders treat a strong credit history as lower risk, and they price accordingly. FICO Scores of 740 or higher tend to attract the most competitive rates. Many lenders set a minimum somewhere between 600 and 680. Specifics vary by lender. 

CLTV

Your combined loan-to-value (CLTV) ratio is the total of all loans on your home divided by the home's market value. The lender will include the new HELOC limit when calculating your CLTV.

A lower CLTV means less risk for the lender. Less risk usually means a lower rate. Lenders generally cap CLTV between 60% and 90%, depending on credit score, property type, property value, loan size, and other details in your application. 

A quick example:

DTI ratio and income

Your debt-to-income (DTI) ratio is your total monthly debt payments divided by your gross (pre-tax) monthly income. Most lenders prefer a DTI of 43% or less. Some accept up to 50% when you bring compensating factors like a high credit score or significant home equity.

A HELOC payment counts as a monthly debt obligation, so a new HELOC pushes your DTI higher. Lenders factor an estimated HELOC payment into the calculation before making a decision, even before you draw on the line of credit.

How the Federal Reserve affects HELOC rates

The Federal Reserve sets the federal funds rate, which influences the prime rate. When the Fed raises or lowers its benchmark, the prime rate usually follows. Many variable-rate HELOCs reflect changes to the prime rate with each scheduled rate adjustment.

The mechanics are straightforward. When variable HELOC rates fall, your monthly payment shrinks, or your balance pays down faster at the same payment level. When the Fed raises rates, the same chain runs in reverse. 

Fixed-rate vs. variable-rate HELOCs

Most HELOCs have variable rates. The interest rate could rise or fall over time as the prime rate changes, and your monthly payment moves with it.

A fixed-rate HELOC works differently. The rate locks at closing and stays the same for the life of the loan. The payment amount is predictable from your first statement to your last.

Some lenders let you fix your variable rate for a specific withdrawal or a set period of time. Your variable rate may also become fixed when the draw period ends and you enter the repayment period.

If you'd rather not deal with any rate uncertainty, a fixed-rate HELOC could be the way to go. Achieve Loans fixed-rate HELOCs have the same interest rate from the get-go without the potential variability from the market.

How HELOC rates compare to other borrowing options

HELOC rates are usually lower than personal loan and credit card rates because a HELOC is secured by your home. If you don't repay the loan, the lender could foreclose on your home. This reduces the lender's risk—and often your interest rate.

Compared to other secured options, a HELOC tends to be more flexible since it's a reusable credit line. A home equity loan provides a one-time loan at a fixed rate. Both are second mortgages if you're still paying your purchase mortgage. Both typically have similar interest rate ranges.

A cash-out refinance is different. This replaces your existing mortgage with a new, larger mortgage. The rate for a cash-out refinance is usually similar to purchase mortgage rates.

Estimate your HELOC payment before you apply

Many HELOC lenders enable you to prequalify to see what type of rate you may be offered. When they use a soft credit inquiry, it doesn't impact your credit score. Once you've done this, the next question is what your monthly payment might be. 

Three inputs determine the answer: the amount you draw, the interest rate, and whether your lender requires interest-only or principal-plus-interest payments during the draw period. Achieve Loans requires full principal-plus-interest payments throughout the draw period.

Achieve's free HELOC payment calculator takes your draw amount and rate as inputs and returns an estimated monthly payment in seconds. You could run different scenarios to find out how the numbers move:

• Try a higher rate. If the prime rate climbs, what would your payment be? This is especially useful for variable-rate HELOC borrowers who are stress-testing their budgets.

• Compare draw amounts. A $50,000 draw and a $100,000 draw at the same rate produce very different monthly payments. This could help you decide how much to borrow.

• Test a fixed rate against a variable one. If you are considering a fixed-rate HELOC, compare the locked-in payment to a variable-rate scenario at a few different rates.

A calculator estimate is a planning tool, not a rate quote. Your actual rate and payment are confirmed when you apply.

How to get a competitive HELOC rate

Several moves before you apply could help push your rate lower:

• Strengthen your credit score. Review your credit report for errors and dispute inaccuracies. Higher credit scores generally qualify for lower interest rates.

• Lower your DTI. Pay down existing debt balances before you apply, if you can. Less debt on paper means a stronger DTI.

• Compare offers. Rates, margins, and fees vary across lenders. Get quotes from at least three to five. Prequalify with lenders using soft credit inquiries to avoid credit impact.

• Ask about discounts. Some lenders offer a lower rate for things like autopay enrollment or having other accounts.

• Consider a fixed-rate HELOC. If you plan to carry a balance for several years, a locked rate means future Fed moves won't affect your interest.

• Borrow only what you need. A smaller HELOC relative to the value of your home generally means a lower CLTV, which could work in your favor when the lender sets your rate.

What to know about HELOC rate adjustments

For variable-rate HELOCs, rate changes tend to follow a predictable pattern:

• Frequency. Rate adjustments should occur according to the schedule in the terms of your HELOC agreement.

• Trigger. When the prime rate moves, your rate likely moves on your next adjustment date.

• Lifetime cap. This is the highest your rate could ever reach over the life of the loan. Federal regulations require lenders to disclose this cap. The maximum rate varies by lender and loan.

• Rate floor. Some lenders also set a minimum interest rate, known as a rate floor, below which your rate can’t fall even if the index declines.

Variable rates aren't for everyone. Consider a fixed-rate HELOC if you don't want to worry about rates increasing during your loan term. 

Achieve Loans offers fixed-rate HELOCs with predictable payments. Find out if you qualify with no impact to your credit.