Current HELOC Rates — And How to Get the Lowest Ones (original) (raw)

The latest rates on home equity lines of credit are lower than other loan options

Aly J. Yale

Written by

Aly J. Yale

Contributor, Buy Side from WSJ

Aly J. Yale is a contributor to Buy Side from WSJ and a personal finance journalist with work featured in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.

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Valerie Morris

Written by

Valerie Morris

Editor

Valerie Morris is a content editor with a focus on personal finance. She has seven years of experience editing copy for accuracy, clarity, and conciseness to inform and empower readers. Previously, she worked for news outlet The Hill, editing articles about politics and policy.

Updated September 20, 2024, 10:34 AM EDT

Home equity lines of credit, more commonly referred to as HELOCs, have been a popular financial tool for homeowners in recent years. With the Federal Reserve’s decision to cut interest rates by a half-point in September, homeowners could see HELOC interest rates eventually dip in response.

HELOCs work much like credit cards, allowing homeowners to turn their equity — their owned stake in the home — into a pool of funds they can withdraw from as needed. While the majority of borrowers use HELOCs to cover the costs of home repairs or renovations, in part because of potential mortgage tax benefits, there are no rules about what you can use a HELOC to pay for.

It’s a relatively good time to take out a HELOC, too. Though interest rates on virtually all financial products have soared in recent years, rates are lower for HELOCs than for similar products. The average rate on a credit card is now more than 20%, and personal loan rates sit at 12% or higher. Average HELOC rates, on the other hand, are currently in the high single digits.

That said, rates on HELOCs and other financial products are personalized, and your HELOC rate will depend on market conditions when you apply, your lender, your financial profile and various other factors. They’re also usually variable and can change over time. Here’s what you need to know about HELOC rates to decide if this product is right for you.

Current HELOC rates

In the past few years, rates on new HELOCs have been on the rise, thanks largely to the Federal Reserve. In an attempt to quell inflation, the central bank has increased its benchmark federal funds rate over the past two years, only cutting the rate in September 2024 as inflation steadily trended lower. This rate serves as the basis for the prime rate — the index most HELOC rates hinge on.

To get the rates charged to HELOC borrowers, banks add a margin — typically 0.25 to a few percentage points — on top of the prime rate. So, when the prime rate goes up, most HELOC rates rise as well.

Keep in mind that most HELOCs have variable rates — meaning the interest rate fluctuates over time with the prime rate. Typically, you’ll get an initial rate, which will last for six to 12 months. After that, the rate will adjust up or down monthly based on the index rate it’s tied to (the margin remains the same, though).

Here’s a look at where HELOC rates are currently — and where they were one year ago:

Bankrate

Where are HELOC rates headed?

Policymakers at the Fed lowered the federal funds rate 0.50 percentage points at their September meeting, the first cut in more than four years. Economists are hopeful that the policymakers will make additional cuts at their next meetings in November and December. According to the CME Group’s FedWatch Tool, which uses investment activity to predict future Fed moves, it’s highly likely the central bank will lower the rate to 4% to 4.25% in December.

As the fed funds rate comes down, HELOC rates should follow suit but don’t expect them to suddenly plummet.

“Changes to the federal funds rate will trickle down to HELOCs and other forms of consumer credit,” says Kyle Enright, president of mortgage at Achieve Lending. “But homeowners need to understand that even if the Fed cuts rates multiple times in 2024, the ultra-low mortgage rates seen during the pandemic won’t be coming back anytime soon.”

What determines your HELOC rate?

Beyond the prime rate, the lender you choose plays an important role in determining your HELOC rate, too.

“The second biggest factor is the margin that the individual institution charges — the amount that the lender adds to the prime rate,” says Mark Worthington, branch manager at Churchill Mortgage in Bend, Oregon.

Lenders determine margins by considering many factors, such as their overhead costs and the risk an individual borrower presents to the lender. Borrowers with low credit scores, a lot of debt and high loan amounts, for example, may have more trouble making their payments, so lenders add on a higher margin to account for that risk. Those with higher credit scores, lots of home equity and lower loan amounts and debts, on the other hand, are considered lower risk and will get a smaller margin.

“Lenders want to see that homeowners have a strong record of paying their bills and debts on time and that they have sufficient equity available to obtain a HELOC without putting their homes at risk,” Enright says.

The HELOC’s term — or total length from five to 30 years — can influence the margin a lender gives you, too. As Worthington explains, “The shorter the term, the lower the rates.”

How to get the lowest HELOC rate

HELOC rates vary widely from one borrower to another. To get the lowest one, your first step should be to boost your credit score. The best rates typically go to borrowers with 760 scores or higher, so if your score is below this, work on reducing your debts, paying your bills on time and reducing your credit utilization ratio. Disputing errors on your credit report can help, too.

You should also shop around for your lender. Include a variety of banks, credit unions and mortgage companies in your search, but “Start with your local bank who you already have a relationship with,” says Aaron Gordon, branch manager at Guild Mortgage in Las Vegas. “They are usually the most competitive with a HELOC.”

When shopping around, be sure to ask lenders to quote you for a variety of scenarios, including different loan amounts and different loan terms. “You’ll be surprised at the results,” Worthington says.

How do HELOC rates compare to rates on other mortgages?

There are first-lien mortgages, which you’ll use to buy or refinance your house, and second-lien mortgages, which include home equity loans and HELOCs.

With first-lien mortgages, lenders have first claim to your home if you fail to make payments, meaning they’ll get paid first if your home is foreclosed on and sold at auction. Second-lien loans come next, so they’ll only get paid after your first mortgage debt is settled if there are any sale proceeds left.

“HELOC rates are almost always substantially higher than first mortgage and cash-out refinance rates because they are far riskier,” Gordon says. “If you go into default, that first lien is well protected. That second lien has a lot more exposure to loss. It could even be wiped out entirely.”

Since HELOC rates are variable, the rate you’re quoted at the start of your loan probably won’t be the rate you have a few years down the road. For this reason, it’s hard to compare long-term cost differences between HELOCs, fixed-rate mortgages and home equity loans.

Here’s a look at how HELOC rates currently compare to rates on other mortgage products.

Bankrate, Freddie Mac

While HELOC rates may be higher than other mortgage options, they’re smart for some homeowners. Those with a very low rate on their current mortgage, for instance, could potentially save by choosing a HELOC rather than a cash-out refinance. In that case, refinancing could mean replacing a much lower rate with today’s higher one.

Homeowners who need longer-term access to cash can benefit, too. “HELOCs offer flexibility,” Enright says. “You can repay it and then redraw it over time.”

More on home equity

Meet the contributor

Aly J. Yale

Aly J. Yale is a contributor to Buy Side from WSJ and a personal finance journalist with work featured in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.