Home Equity Line of Credit (HELOC): Considerations Regarding Interest Rates, Loan Terms, and More

If you own a home, you may be able to leverage the equity you have in it through a home equity line of credit (HELOC). HELOCs can be a great way to finance home improvements, consolidate debt, or cover other expenses. But there are some things to consider before you apply for a HELOC, including the interest rate, loan term, and repayment options.

Interest Rates

HELOCs typically have variable interest rates, which means the interest rate can go up or down over time. The interest rate is based on the prime rate, which is the rate banks charge their best customers. The prime rate is currently 3.25%. That means the interest rate on your HELOC is likely to be somewhere around 3.25% + the margin (which is the lender's profit).

Loan Terms

HELOCs usually have a 10-year draw period, during which you can borrow money as you need it, up to the limit of the loan. After the draw period ends, you'll enter the repayment period, during which you'll need to repay the loan in full. The repayment period is usually 20 years, but it can be shorter or longer depending on the terms of your loan.

Repayment Options

HELOCs typically have two repayment options: interest-only and principal + interest. With the interest-only option, you'll only need to make payments on the interest for the first 10 years. This can be a good option if you're using the HELOC for short-term expenses and you don't want to increase your monthly payments. But it means you'll need to repay the entire loan balance at the end of the 10-year period.

With the principal + interest option, you'll make payments on both the interest and the principal of the loan for the entire 10-year period. This will result in higher monthly payments, but you'll have the loan paid off at the end of the 10 years.

Which option is best for you will depend on your financial situation and goals. If you're using the HELOC for short-term expenses and you're confident you'll be able to pay off the entire loan balance at the end of the 10 years, the interest-only option may be a good choice. But if you're not sure you'll be able to pay off the loan or you're using the HELOC for long-term expenses, the principal + interest option may be a better choice.

Before you apply for a HELOC, it's important to compare offers from multiple lenders to find the best rate and terms for your needs.