HELOC rates are complex and consist of a margin and prime rate. They can fluctuate from month to month and interest is charged based on the balance accumulated over the course of a month. It’s important to shop around and learn about the interest rates and fees associated with the loan before committing to a particular lender. HELOCs can be risky for homeowners who aren’t savvy.
Home Equity Line of Credit (HELOC) rates are interest rates associated with a home equity line of credit. HELOC rates can get a bit complex, and for borrowers unfamiliar with how HELOCs work, it is possible to have a lot of interest rate issues. For this reason, it’s important to shop around for this type of loan before committing to a particular lender, and to learn about the interest rates and fees associated with the loan ahead of time.
Before delving into the wide world of HELOC rates, it might help to know what a HELOC is. A home equity line of credit is a secured line of credit extended to a homeowner. The maximum amount a homeowner can spend is determined by the equity they have in a home. Instead of a home equity loan, which provides a single, fixed payment based on equity, a HELOC provides revolving credit. Typically, the loan includes a draw period, in which the homeowner can spend up to the maximum, and a repayment period, in which the loan must be paid back.
HELOC rates can be misleading because they consist of a margin and a prime rate. When someone quotes a rate on a HELOC, it includes both the margin and the premium, and the rate is often misleadingly low to encourage people to apply for the loan. If someone takes out a HELOC with an interest rate of 6%, for example, they may not realize that the rate is based on a 4% prime rate and a 2% margin. The 2% margin means that the interest rate will always be 2% above the premium, which means that if the prime rate becomes 9%, the HELOC rate will be 11%, and so on. In many regions, there are no caps on the rate, which means that after the promotional period ends, HELOC rates can go up to around 15%.
The problem with HELOC fees is that they can fluctuate from month to month, rather than being fixed. As the interest rate rises and falls in the general market, HELOC rates also change, and interest is charged based on the balance accumulated over the course of a month, instead of over a year, which is the equivalent to more interest owed each day. In a sense, HELOC rates work like credit card interest rates, which means that interest can really start to add up.
People sometimes compare HELOCs to second mortgages, and in fact they work much like adjustable rate mortgages (ARMs). However, embarking on a HELOC can be risky business, especially for homeowners who aren’t savvy. If the home’s value declines, for example, it’s possible to end up owing more on the home than it’s worth as a result of reckless use of the HELOC, and if interest rates start to rise, a homeowner can be saddled with huge payments just to manage the interest, let alone the principal debt.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
