Sometimes it may feel like the equity you have built in your home is locked away and out of reach. You don’t want to sell your home and get a new mortgage or do a cash-out refinance with a higher rate. However, a second mortgage might be the best answer. The best home equity lenders offer you a choice: a draw-it-as-you-need-it HELOC or a lump-sum home equity loan.
The average HELOC adjustable rate is 7.24%, according to real estate data analytics company Curinos. The national average fixed rate on a home equity loan is 7.37%. Both rates are based on applicants with a minimum credit score of 780 and a maximum combined loan-to-value ratio (CLTV) of less than 70%.
A HELOC allows you to draw from your approved line of credit as you need it. A home equity loan gives you a lump sum.
With first-mortgage rates not moving significantly lower, homeowners with home equity and a low primary mortgage rate may not be able to access that growing value in their home without a home equity loan or HELOC.
The Federal Reserve estimates that homeowners have $34 trillion of equity in their homes. For those who are unwilling to give up their low home loan rate, a second mortgage in the form of a HELOC or HEL can be an excellent solution.
Second mortgage rates are based on an index rate plus a margin. That index for a home equity line of credit is often the prime rate, which has fallen to 6.75%. If a lender added 0.75% as a margin, the HELOC would have a variable rate beginning at 7.50%.
A home equity loan may have a different margin because it is a fixed-rate product.
Lenders have flexibility with pricing on a second mortgage product, such as a HELOC or home equity loan, so it pays to shop around. Your rate will depend on your credit score, the amount of debt you carry, and the amount of your credit line compared to the value of your home.
And average national HELOC rates can include “introductory” rates that may only last for six months or one year. After that, your interest rate will become adjustable, likely beginning at a higher rate.
Again, because a home equity loan has a fixed interest rate, it’s unlikely to have an introductory “teaser” rate.
The most-favored HELOC lenders offer low fees, a fixed-rate option, and generous credit lines. A HELOC allows you to easily use your home equity in any way and in any amount you choose, up to your credit line limit. Pull some out; pay it back. Repeat.
Today, FourLeaf Credit Union is offering a HELOC rate of 5.99% for 12 months on lines up to $500,000. That’s an introductory rate that will convert to an adjustable rate in one year. When shopping for lenders, be aware of both rates.
The best home equity loan lenders may be even easier to find, because the fixed rate you earn will last the length of the repayment period. That means just one rate to focus on. And you’re getting a lump sum, so no draw minimums to consider.
And as always, compare fees and the fine print of repayment terms.
Rates vary from one lender to the next. You may see rates from nearly 6% to as much as 18%. The national average for a HELOC is a variable rate of 7.24%, and a fixed-rate of 7.37% for a home equity loan. Those can serve as your targets when shopping rates from second mortgage lenders.
Is it a good idea to get a HELOC or a home equity loan right now?
For homeowners with low primary mortgage rates and a chunk of equity in their house, it’s probably one of the best times to get a HELOC or home equity loan. You don’t give up that great mortgage rate, and you can use the cash drawn from your equity for things like home improvements, repairs, and upgrades. Or virtually anything else.
If you withdraw the full $50,000 from a line of credit on your home and pay a 7.25% interest rate, your monthly payment during the 10-year draw period would be about $302. That sounds good, but remember that the rate is usually variable, so it changes periodically, and your payments may increase during the 20-year repayment period. A HELOC essentially becomes a 30-year loan. HELOCs are best if you borrow and repay the balance within a much shorter period.
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