How to get the best HELOC rates in 2024

As you make mortgage payments on your property, you build equity in your home. According to information services provider CoreLogic, the average homeowner gained roughly $28,000 in home equity over the last year. Once you’ve built up enough equity, you can borrow from it to cover expenses. Whether you need to make home improvements or send your child to college, a home equity line of credit (HELOC) might be the best option for you. Here is everything you need to know about how HELOC rates work. 

What are HELOC rates? 

HELOC rates represent the amount you’ll pay your lender in return for a line of credit. This rate is charged in addition to your monthly payment. 

However, it’s important to note that there is a big difference between an interest rate and an annual percentage rate (APR). An interest rate represents only the interest you’ll be required to pay back to the lender while APR includes your interest rate and any fees your lender charges such as broker fees, origination fees, application fees, and discount points. 

More often than not, HELOC rates are variable, meaning they will change over time. That said, some lenders offer fixed-rate HELOCs which carry the same interest rate throughout the life of the line of credit.

Pros and cons of HELOCs

HELOCs are a useful tool when you’re in a financial pinch but have their downsides. Here are the pros and cons of HELOCs:

Factors that influence HELOC rates 

Current HELOC rates are influenced by many factors, from the prime rate of each lender to your financial standing. Understanding all of these factors can help you get the best rates possible. 

When determining HELOC rates, lenders typically consider:

• The prime rate: Banks set their own prime rate, a benchmark they use when determining what rates they offer to borrowers. Each lender uses its own formula to set their rates, but they often turn to the Federal Reserve’s federal funds rate as a reference point. 
• Your credit score: Your credit score gives lenders an idea of what kind of borrower you’ve been in the past, which is often a predictable insight into your future habits. You should expect lenders to inquire about your credit before you are given an official rate quote. 
• Your debt-to-income ratio (DTI): Your DTI represents your monthly debt payments compared to your pre-tax income. A high DTI is more likely to land you less favorable HELOC interest rates and possibly even rejection of your application.
• The amount of equity you own: HELOC lenders want to see that you have sufficient equity in your home to cover the amount you want to borrow. If you’re looking to borrow against all of your equity, this could be seen by your lender as a higher risk and drive up your rate. 
• Your home’s appraised value: Since your home will act as collateral for your line of credit, the appraised value of your home will help lenders understand how much risk they are taking on if they lend to you, as well as give them an accurate gauge for your home’s equity. 

How to compare HELOC rates 

When comparing HELOC rates, don’t take them at face value — not all rates and lenders are built the same. Here’s how to compare rate features and other factors so you can find the best HELOC lender:

• Get multiple rate quotes: You should get various HELOC rate quotes through individual lenders' sites or an online marketplace to ensure you find the best rate. 
• Distinguish interest rates from APRs: It’s important to know if the rates you are comparing are interest rates or APRs, since comparing them against each other might not give you an accurate picture of how they will affect your loan. 
• Consider if it is a variable or fixed rate: Although HELOCs often come with variable rates, some lenders offer fixed rates. Over the life of the line of credit, this can make a big difference in the overall cost, so you should carefully consider which works best for your needs. 
• Look at the draw period: The draw period on a HELOC is how long you have to use the funds you’re borrowing. HELOC draw periods can vary, but up to 10 years is the most common. 
• Compare repayment periods: After the initial draw period, the repayment period begins and you start to pay back what you borrowed. Just as draw periods vary, so do repayment periods — usually up to 20 years. 
• Consider how you’ll draw from your line of credit: Different lenders offer different withdrawal methods for HELOCs, so you’ll want to consider how you’ll access your funds. Depending on the lender, this could be by check, credit card, or other means.

Tips for getting the best HELOC rates 

There are some steps you can take to improve your financial situation, which can often make you eligible for lower interest rates:

• Improve your credit score: Higher credit scores improve your chances of getting a good HELOC rate. You can request a copy of your credit report from AnnualCreditReport.com. If your score is low, you can improve it by disputing errors on your report, lowering your credit utilization, and paying off debts in collection.
• Lower your DTI: Lowering your DTI can improve your financial profile, often leading to better scores. To lower your DTI, consider paying down your outstanding debts or taking steps to raise your income, such as asking for a raise or picking up a side gig. 
• Negotiate your rate: While not all lenders allow you to negotiate your rate, it is worth a shot. If your lender is open to negotiating, consider asking them to reduce your rate or waive fees.
• Take advantage of rate locks: If your lender allows, you can lock in an interest rate so it won’t change before closing. In an ever-changing market, this can help you ensure you keep the rate you are quoted. However, note that not all HELOC lenders offer rate locks.
• Apply with a cosigner: If you can’t qualify for a good rate on your own, applying for a HELOC with a cosigner can mitigate your risk to lenders and lower your rate. Make sure the cosigner is willing to take over making payments if you’re no longer able to. 
• Refinance your current mortgage: If you have an existing HELOC with a high rate, you might consider refinancing it for a lower rate with a different lender. 

Alternatives to HELOCs

Although HELOCs are a good option for many homeowners, they might not be the right option for you. If this is the case, there are still ways for you to access the equity you’ve built in your home or borrow money from a lender.

If you’ve decided against a HELOC or are having a hard time qualifying, you might consider one of these HELOC alternatives:

• Cash-out refinance: Cash-out refinance loans let you trade your equity for cash by lending you an amount over what you owe on your mortgage. You replace your existing mortgage with the new mortgage, plus extra you receive as cash. 
• Home equity loan: Often referred to as a second mortgage, home equity loans are similar to HELOCs and let you borrow money by using your equity as collateral. However, these usually come with fixed rates and lump sum payouts, and you start making payments right away. 
• Personal loan: Sometimes called installment loans, personal loans are loan products that allow you to borrow a lump sum upfront and pay it back in installments. Unlike HELOCs, these do not require you to put up your home as collateral, though secured personal loans will require collateral in some form. 
• Credit card: A credit card is a revolving line of credit that is issued by a financial institution. As long as you make payments and stay below your credit limit, you can use credit cards for almost any purchase. 
• Personal line of credit: Personal lines of credit work similarly to a credit card, complete with a credit limit and a monthly bill. These unsecured lines of credit don’t require collateral and will not impact the equity you’ve built in your home. 

HELOC rates FAQ 

How can I get the lowest HELOC rates?

To get the lowest HELOC rates you’ll want to lower your risk to lenders and shop around for multiple quotes. If you’re worried you won’t qualify for a good rate, take steps to improve your credit score, lower your DTI, and apply with a cosigner if necessary. 

Are HELOC rates fixed or variable?

Variable rates are typical for HELOCs, but some lenders offer fixed interest rates if you shop around. Since HELOCs with a variable interest rate are more common, you might find a wider range of loan options to choose from. Your monthly payments will be less predictable with a variable rate because the interest rate fluctuates with the market. If you prefer a fixed-rate loan and predictable payments for the life of the loan, you’ll want to seek out mortgage lenders that specifically offer fixed-rate HELOCs. Some lenders also might only offer a fixed-rate option if you borrow more than a certain amount.

What factors should I consider when comparing HELOC rates?

When comparing HELOC rates, you should consider many different factors, including whether the rate you’ve been quoted is an interest rate or an APR, how long the draw and repayment periods are, if there are rate discounts or annual fees, and how you can use your funds. 

How does my credit score affect HELOC rates?

Typically, lenders give the best HELOC rates to borrowers who pose the least amount of risk to their bottom line. Since lenders pull your credit report to review your borrower history, your credit score plays a big part in determining your HELOC rates. Generally, borrowers with higher credit scores have a history of managing debt well and making on-time payments, so they’re likely to get better rates. According to FICO, a good credit score is between 670 to 739.