Interest rates on home equity lines of credit (HELOCs) and home equity loans have seen a significant decrease over the past year. According to real estate analytics firm Curinos, the average HELOC rate is currently at 7.25%, down 19 basis points from last month. Similarly, the national average rate on a home equity loan stands at 7.56%, a three-basis point drop from the previous month. These 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%.
With primary home mortgage rates remaining steady, homeowners with substantial home equity may feel frustrated about not being able to access that value. However, a good solution for these homeowners could be to consider a home equity line of credit or a home equity loan. The Federal Reserve estimates that homeowners collectively have $36 trillion of equity tied up in their homes. By utilizing a second mortgage HELOC or HEL, homeowners in the U.S. can tap into this record-setting equity.
It’s important to note that home equity interest rates differ from primary mortgage rates. Second mortgage rates are typically based on an index rate plus a margin, with the prime rate being a common index. As the prime rate has recently fallen to 6.75%, a lender adding a 0.75% margin would result in a HELOC rate of 7.50%. Since lenders have flexibility in pricing second mortgage products, such as HELOCs or home equity loans, it’s advisable to shop around to secure the best rate. Factors that can influence your rate include your credit score, existing debt levels, and the ratio of your credit line to your home’s value.
Average national HELOC rates may include introductory rates that are only temporary and could significantly increase after the introductory period ends. On the other hand, HELs typically do not have introductory rates and offer a fixed interest rate for the duration of the loan agreement.
Some of the best HELOC lenders provide low fees, a fixed-rate option, and generous credit lines, allowing homeowners to access their home equity as needed. While HELOCs offer flexibility in using home equity funds, homeowners must be prepared for potential rate fluctuations with variable interest rates. On the other hand, home equity loans provide a lump sum with a fixed interest rate for the repayment period, simplifying the borrower’s focus on one rate.
As always, it’s crucial to compare fees and repayment terms when considering a HELOC or home equity loan. Rates can vary between lenders, ranging from below 6% to as high as 18%, depending on the borrower’s creditworthiness and diligence in shopping around.
For homeowners with low primary mortgage rates and significant equity in their homes, now may be an ideal time to consider a HELOC or home equity loan. By leveraging their home equity, homeowners can fund home improvements, repairs, or upgrades without sacrificing their favorable mortgage rates. However, borrowers should be mindful of potential rate fluctuations with HELOCs and consider repaying the balance within a shorter period to avoid extended repayment terms.
Overall, with interest rates on HELOCs and home equity loans at attractive levels, homeowners have the opportunity to access their home equity while retaining their low-rate primary mortgages. It’s essential to carefully assess individual financial circumstances and compare offerings from different lenders to secure the most favorable terms for a second mortgage product.
