By In our recently published e-guide, “Understanding & Using a HELOC to Finance Your Next Big Project,” we give you a bunch of great information about getting and using a home equity line of credit (HELOC).
But what are the best ways to ensure that you get a great rate?
What is a HELOC, anyway?
If you already have decided to apply for a HELOC, you probably know a lot of the basics. But if you still are considering whether or not a HELOC is right for you, here are a few of the key things you need to know:
- A HELOC is a line of credit, not a loan. Instead of getting a single sum of money at one time, you can draw from your credit line as you need it over the course of several years.
- HELOC eligibility and the corresponding loan rate will be determined by the amount of equity you have in your home, your debt-to-income ratio and your credit score.
- HELOC funds can be used to pay for just about anything! Some ways of using the funds are better than others, though. Most people use HELOC money to pay for major home renovations, debt consolidation and education related expenses.
How can you get a great HELOC rate?
One of the reasons that people choose a HELOC to finance their projects instead of a credit card or a store credit account is that the interest rates are better.
In 2019, the average store credit card interest rate was 26 percent! Compare that to the average HELOC rate of 6.07 percent. Talk about a big difference!
Because the average is 6.07 percent, that means that some people get a higher rate while others get a lower rate.
Assuming that getting a low interest rate is one of your goals, these are five great strategies to ensure that you get the best interest rate possible.
1. Make sure your debt-to-income ratio stays as low as possible.
When it comes to securing a good interest rate on any kind of loan. A high debt-to-income (DTI) ratio can end up causing you to get turned down for a HELOC, whereas a low DTI can get you a better interest rate.
You can use this tool to calculate your DTI.
MarketWatch provides six ways to lower your DTI if that is something you need to do before applying for a HELOC:
- Get your other loans paid off before they are due.
- Prioritize paying off accounts that have a high “bill-to-balance” ratio.
- Work on increasing your income at your main job.
- Find additional side gigs to increase your income.
- Utilize balance transfers to reduce the interest rates you’re currently paying.
2. Shop around.
This one is pretty straightforward: Check with multiple lending institutions to see what kind of rate they can give you. Even if your mortgage is held with one lender, that doesn’t mean your HELOC needs to be through the same lender.
Compare rates to ensure that you are getting the best deal.
3. Improve your credit score.
Your credit score is one of the main things that lenders look at when providing you with an interest rate.
The better your credit score, the better your interest rate.
Typically, you need a credit score of at least a 680 to qualify for a HELOC or home equity loan. Check out our advice on how to improve your credit score.
4. Continue to build equity in your house.
The more equity you have in your home, the more money you can get out of your HELOC.
Calculate your loan-to-value (LTV) ratio to find out how much you can get out of your HELOC, depending on how much of your mortgage you already have paid off. The more you have paid off, the more money you can get out of your house with a HELOC.
This may have a minimal impact on your interest rate, but it will provide you with more funds that are accessible to you, and that is an important aspect to consider when applying for a HELOC.
5. Don’t rush into applying for a HELOC before you are ready.
Several of the strategies we’ve identified here take time! Don’t rush into applying for a HELOC until you have looked through these factors and worked to ensure that you’re going to get the best rate.
Sometimes, it can take weeks, months or even years to improve your DTI or fix a bad credit score. If you need money now, you may have no choice about when you apply for a HELOC. But if you have some flexibility on when you need to make your home improvements or finance your next big project, consider working on these factors prior to applying to ensure a better rate.
Ready to learn more?
We are waiting to hear from you! Contact us today to set up an appointment to compare various financing options that are available to you through WEOKIE, including a HELOC.
Don’t forget to check out our free e-guide below, which will answer many of your questions about applying for a HELOC, getting approved and using your HELOC funds.
We look forward to hearing from you!
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