Home equity lines of credit can be a good fit in certain situations. If they are something you’re considering, you want to go about it intelligently. If you have a combined loan-to-value (CLTV) ratio of under 90%, you might be a good candidate for a HELOC. Add your existing loan balance to the line of credit you’re interested in, and divide it by your home’s appraised value to determine your CLTV.
Unlike personal loans or credit cards, HELOCs already tend to have lower interest rates. But we’re going to give you tips on how to get the best HELOC rate possible for your situation and financial circumstances. That way, you can enjoy manageable monthly payments during your repayment period.
1. Improve Your Credit
If you don’t already know your credit score, get a clear picture of where you stand financially and view your FICO score for free on online or mobile banking.
Good credit is important to secure favorable interest rates. If possible, take steps to improve your score.
2. Compare Lenders
Before you get started, it’s a good idea to shop around different lenders’ HELOCs. Here are some factors to look at when you’re considering a HELOC with UCU.
Unlike a home equity loan where you receive a lump sum and usually pay fixed interest rates, HELOCs have variable interest rates. This means they can fluctuate as interest rates change over time. Be sure to check how long the low initial rates offered will last.
A HELOC consists of two phases: a “draw” or borrowing period, followed by a repayment period. The repayment period can last up to 25 years.
In addition to comparing rates, find out how long a HELOC draw period is. This is especially important since you can no longer borrow once the draw period is over.
Review Terms & Conditions
Some things you may want to consider include:
- Interest rate caps. See if the HELOC you’re considering has maximum interest rate caps, either for the length of the loan or for a specific time.
- Rate indexes and markups. Often, the interest rate will be tied to the prime rate. However, your lender may also add a markup. This is an additional interest payment that lenders may offer at an initial discount. When checking terms and conditions, look for markup increases.
3. Be Aware of Fees & Penalties
Be sure to review fees and penalties when considering a HELOC. Find out if there is an origination fee – or an inactivity fee. Some lenders charge you for not making withdrawals from your HELOC.
An additional cost to look for: prepayment penalties. Sometimes, lenders will charge borrowers who pay off their loan amounts early. This can happen because you decide to sell your house, so if you have substantial equity in your home but think you might sell during the life of the HELOC, consider whether it’s worthwhile to take out the maximum amount allowed.
Balloon payments are a term for lower monthly payments during the repayment period, with a large payment at the end. If this is something you’re comfortable with, be sure to factor in the balloon payment due date when planning and budgeting.
4. Make Sure You Have Enough Equity
The amount of equity you’ve built up in your home can impact the rate for which you’re eligible on your HELOC.
Lenders look at greater amounts of equity as an indication that borrowers don’t have excessive amounts of debt against their homes. This makes them more favorable loan prospects from a lender’s perspective.
The University Credit Union Advantage
Credit unions, like UCU, can offer more personalized member service. As cooperative, member-owned not-for-profit financial institutions, they can afford to reward borrowers with lower interest rates.
University Credit Union members can take advantage of simple, immediate online access to their HELOC funds, with no annual fees.
Our products and services include more than HELOCs. Members can open checking and savings accounts, insurance products and financial planning services, and credit cards, as well as a variety of loan types, including auto and home loans.
Ready to learn more about HELOCs?
Click to read general HELOC considerations and requirements