Comparing Home Equity Lines of Credit: How To Get The Best Deal

You’re in the market for a new Home Equity Line of Credit (HELOC), and you’re having trouble deciding if a HELOC suits you because you’re bombarded with so many different offers. And every offer seems to claim they have the “best” HELOC for homeowners. Comparing home equity lines of credit is difficult because there are so many variables and differences between the lenders.

In this article, I’m going to help you sift through all the marketing hype so that you can decide if a HELOC is right for you and give you the tools to find the best HELOC for your long-term financial goals.

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What is a home equity line of credit?

A Home Equity Line of Credit (HELOC) is similar to a credit card in that you can access home equity funds when you need to make a purchase or pay a bill. A lender will issue you a maximum credit limit based on the equity of your home and any mortgage loans you have tied to the property.

Another feature similar to a credit card is that as you pay down your HELOC balance, you can re-access that amount provided you are still in your draw period (more on this below). For example, if you have a HELOC and have maxed out the credit limit (say $60,000) and paid that balance down to $40,000, you can re-access the $20,000 you’ve paid if you are inside your draw period. 

Some HELOCs have a fixed rate period, but most have an adjustable rate from beginning to end, and the rate can adjust every month.

Lastly, you can use your HELOC funds for just about anything. Speak to your House Numbers mortgage advisor to learn more about the restrictions.

What are the requirements for obtaining a HELOC?

The requirements for obtaining a HELOC will vary from lender to lender. Here are some general requirements that usually result in an approval from an underwriter.

• A minimum credit score.
• You are requesting the HELOC for your primary residence.
• The Combined Loan-To-Value (CLTV) ratio is 95% or less.
• Your Debt-To-Income (DTI) ratio is below 43%.

While there is no guarantee of approval, meeting these four requirements significantly increases your chances of obtaining an approval from an underwriter. If you don’t meet the above requirements, don’t worry because some lenders will offer a HELOC to people with a lower credit score, a higher DTI, or a higher CLTV ratio.

How to compare HELOC programs with different lenders

There are plenty of lenders offering HELOCs. With a few keystrokes, you can find the websites for dozens of online lenders providing a HELOC program to homeowners in your area. Other than the rate, are there any differences? Absolutely, and it’s vital that you learn what those differences are.

Here is what you want to know when comparing two more HELOC programs.

• Fees: What are the total fees? What is the annual fee?
• Rate: What is the interest rate, and how is it calculated monthly? Is there a teaser rate? What is the floor rate?
• Penalty: Is there a pre-payment penalty? If there is, how long is it, and what is the amount?
• Draw Period: How long do I have to access the line of credit (draw period)? What happens after the draw period is over?
• Process: How long is the process, and do I need an appraisal?

Use House Numbers

Instead of spending countless days and hours researching different lenders, why not let House Numbers do the work for you? Using the information you provide along with public financial data, we scan the market to find you the best HELOC for your needs. We’ve partnered with the best lenders across multiple states to ensure that the offer you receive matches your exact needs. Signup today for free to see how House Numbers can help you secure the best HELOC for you.

If you are looking for a HELOC, you’ll want to ensure the lender answers these questions in detail. Answering these questions is critical to determining which HELOC program is best for you and your financial situation.

HELOC fees, what to look for

Seeing this at the top of the list will surprise some homeowners. A homeowner usually has a singular focus, the HELOC rate, and they ignore the fees, which is a huge mistake. Before you commit to a lender, find out two things about the fees being charged;

• What are the total fees for everything?
• What is the itemized breakdown of fees?

When determining the lender’s proposed fees, asking these exact questions is best.

Getting the total fee amount is the most important thing. The itemized breakdown is also essential, but the total amount is more important, and here’s why. A lender can lowball or not charge in one area and then jack up fees in another.

And they’ll do this because some homeowners, when asking about fees, will just ask if there are any points. So asking specifically, “What are the total HELOC fees & closing costs for everything?” is essential.

As you obtain your quotes, you’ll see some lenders charge points and a low admin fee. Other lenders charge no points and a high admin fee. Also, there are title and escrow fees and possibly an appraisal fee which can vary from lender to lender. Two lenders rarely charge the same fees, so you need both the total amount and a breakdown.

Don’t forget the annual fee

A loan officer will sometimes forget to include the annual fee a lender charges for their HELOC program since the fee is waived in the first year. When obtaining your quote, ask the loan officer what is the annual fee to keep the HELOC open.

The amount of the Annual Fee, sometimes called a maintenance fee, will differ from lender to lender.

Watch out for the no-closing fee HELOC 

A no-closing fee HELOC sounds great, but there are two things you need to know before committing to a lender that offers this type of HELOC.

• It will most likely have a pre-payment penalty.
• The rate will likely be much higher than HELOCs with closing fees.
• If the HELOC has an Annual Fee, it will typically be much higher than the Annual Fee charged by lenders that offer HELOCs with closing fees.

Pre-payment penalties can last years, which you need to consider before moving forward with a no-closing fee HELOC.

The teaser rate, and understand the real rate

Did you know many HELOC lenders offer and quote a teaser rate for the first 30 – 90 days? Unfortunately, too many homeowners fall for this and discover later in the loan application process or post-closing that their super-low rate was just for a short time.

Avoid getting too excited about a teaser rate, and focus on the real HELOC rate.

Your real HELOC rate

HELOCs are determined by the Prime Rate and adding a margin. The Prime Rate is an interest rate bank use to lend money. The Fed Funds Rate directly impacts Prime Rate. The margin is the rate of profit the lender obtains when you access the credit line and make payments.

Your real HELOC rate is the combination of Prime Rate and your margin, and this is the rate you should use to compare one lender’s quote to another.

The draw period for your HELOC

What is the “draw period”? A draw period is the time frame you have to access your HELOC. With every HELOC, you have a limited time frame to use the credit line to make purchases or pay bills. Some lenders have a short period of fewer than five years, others set it at five years, but most lenders allow for a ten-year draw period.

Once the draw period is over, you can no longer access the credit line. Your monthly payment switches from an interest-only payment to a fully amortized payment, where you pay both principal and interest each month.

Ask questions about the approval process

While this part was listed last, it’s still important in determining which HELOC is suitable for your financial goals. Why? Because guidelines from lender to lender and the overall process from lender to lender will differ.

You may not qualify with one lender, but with another, you do qualify. Asking questions and understanding the approval process will save you time and money. Ask the loan officer these specific questions;

• What is the minimum credit score needed?
• What is the maximum Combined-Loan-To-Value Ratio?
• What is your maximum Debt-To-Income ratio?
• If you are trying to get a HELOC for a second home or a rental property, ask the loan officer if their company will lend on those properties.
• Find out if you need an appraisal.
• Ask the loan officer to describe the process and how long it will take to close your HELOC. 

Asking these questions will help you locate the right lender for your financial goals and avoid a lender that is not a good match.

Is a HELOC right for me?

The only person who can answer “Is a HELOC right for me?” is you, the homeowner. You now understand what a HELOC is and how to compare one HELOC program to another. Now let’s discuss the benefits and drawbacks of a HELOC.

What are the benefits of a HELOC?

Here are the main benefits of a HELOC.

• An available line of credit for when you need funds.
• As you pay down your balance, you can re-access the credit line as many times as you like (provided you are still in your draw period).
• The process is usually more straightforward and quicker than other mortgage products.

What are the drawbacks of a HELOC?

These are the main drawbacks of a HELOC.

• The interest rate can adjust frequently, resulting in a much higher rate than you anticipated.
• There might be an annual fee.
• You could have a pre-payment penalty.
• A HELOC means you’ll have two loans attached to your property (if you have a first mortgage). 

Getting the best possible HELOC

Getting the best possible Home Equity Line of Credit is the top goal for every homeowner seeking a line of credit option to access their home’s equity. Knowing the requirements, asking the right questions, comparing different options, understanding the benefits, and recognizing the drawbacks will enable you to make an informed decision.

The only person that can decide if a HELOC is right for you is you, the homeowner. Use the information in this article to help you make that decision.

Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. All information shown here is for illustrative purpose only and the author is not making a recommendation of any particular product over another. All views and opinions expressed in this post belong to the author.