Home equity lines of credit — better known as HELOCs — are a viable option for borrowing against the equity in your home in order to pay for some of life’s big expenses, like education costs, medical debt or home renovations. They can be a good alternative to high-interest credit cards or personal loans, especially when you’re in need of funding a large purchase.
Let’s take a closer look at what HELOCs are, how they work, how they’re different from other loan products and how some of the top HELOC products on the market compare to each other.
Compare Home Equity Line of Credit Rates
|Bank||Current Rate (APR)||Line Amount||Description|
|PenFed Credit Union||5.5%-6.6%||$25,000 – $500,000||Must be a member, but offers an interest-only HELOC option|
|Bank of America||3.490% APR for the first 12 months, 5.40% APR thereafter||$25,000 – $1,000,000||Offers interest rate discounts and the ability to switch to a fixed-rate option|
|Chase Bank||5.25% APR – 7.89% APR depending on amount and credit score||$50,000 – $500,000||Offers interest rate discounts and the ability to switch to a fixed-rate option|
|PNC Bank||APRs vary based on where you live||$10,000 – 89.9% LTV||Relatively few fees, but there is little transparency about their loan terms|
|SunTrust||3.49% APR for the first 12 months, 4.75% – 6.22% APR thereafter||$10,000 – $500,000||No closing costs as long as you keep the account open for three years|
|U.S. Bank||4.15% APR to 8.45% APR||$15,000 – $750,000||Interest-only HELOC option|
What is a HELOC?
As we mentioned above, a home equity line of credit is a line of credit that allows you to borrow against the equity in your home, which is basically the percentage of your home that you own outright. To calculate equity, you subtract the amount you still owe on your mortgage from the total value of your home. For example, if your home is worth $525,000 and you still owe $325,000 on your mortgage, your equity is $200,000. Most banks allow you to take out a line of credit in an amount that’s equal to a portion of your equity — often 80% to 85% or so.
People typically take out a HELOC to pay for life’s big expenses, like college tuition, large medical debts or home renovation projects.
The typical HELOC is split into two distinct periods: the draw period and the repayment period. During the draw period, you can borrow from the HELOC via multiple transactions, much like you would with a credit card. Once the draw period is over and you enter the repayment period, you are responsible for repaying the balance of what you spent during the draw period, with interest.
HELOCs vs Home Equity Loans
HELOCs differ from home equity loans in the way the money is disbursed and the way repayment functions. Home equity loans function similar to a personal loan or a second mortgage. You receive the money in a lump sum and make fixed payments that are predictable each month.
HELOCs, on the other hand, function more like a credit card because you can borrow money when and if needed. You only make payments on money you borrow, and with most HELOCs, interest only accrues on money you borrow.
HELOCs vs Personal Loans
Unlike HELOCs, personal loans are paid out one time in a lump sum. Personal loans and construction loans tend to come with higher interest rates than HELOCs because they are unsecured loans, meaning that the bank has nothing to take possession of if you choose to stop making payments and default on the loan.
HELOCs, on the other hand, are secured by your home, so you can often secure them at lower interest rates than personal loans. That low interest rate has a trade-off, though. Yes, you’ll likely receive a lower interest rate on a HELOC, but if you stop making payments, the lender can come after your home.
PenFed Credit Union
Current interest rates:
- 80% LTV or less: 5.50% APR
- 80.01% to 85% LTV: 6.00% APR
- 85.01% to 90% LTV: 6.50% APR
As with all credit unions, you have to be a member of PenFed Credit Union in order to gain access to their products. That said, once you join, they offer an array of home equity options to choose from. This includes an interest-only HELOC option, which allows you to only pay the interest on your line of credit during the draw period, which will drastically reduce your payments.
If you choose to go that route, though, it’s important to remember that once the draw period is over, your payment will increase substantially because you’ll have to start paying off both the principal and the interest on the loan.
Bank of America
Current interest rate:
- 3.490% APR for the first 12 months; 5.40% APR after
Bank of America is a large institution with branches all across the nation, which is one of the things it has going for it. If you are a person who prefers hands-on help with the application process, the size of this lender could be of benefit to you. Bank of America’s size also allows them to offer discounts that aren’t offered by the competition.
With BofA, you have the chance to lower the interest rate on your HELOC by doing things like signing up for automatic payments. BofA also offers an option to switch to a fixed-rate model, if you decide at some point that you’d prefer more predictable monthly payments.
Current interest rate:
- 5.25% APR – 7.89% APR, depending on the loan amount and credit score
Chase Bank is another mega-institution, which is probably why their home equity line of credit (HELOC) option is very comparable to the one offered by Bank of America. Chase offers interest rate discounts in return for doing simple tasks, like making the payment for your HELOC from a Chase checking account.
Chase also offers their borrowers the ability to switch to a fixed-rate HELOC, and as an added bonus, you can borrow larger sums of money from Chase than you can from most other banks, so if your project has a hefty price tag, Chase may be the way to go.
Current interest rate:
- APRs vary based on where you live
PNC Bank’s approach to HELOC lending isn’t very transparent, but they are one of the lenders with the lowest HELOC-related fees, which is a positive. In fact, the company is very open on its website about all of the fees that it charges for its HELOC product, which are minimal compared to other lenders.
The downside, though, is that PNC doesn’t openly disclose their minimum credit requirements, which means that you will have to apply in order to find out if you qualify. PNC doesn’t make clear what the maximum amount of credit they’ll issue is, either, stating only that homeowners will be able to borrow up to 89.9% of the loan-to-value (LTV) on their home.
Current interest rate:
- 3.49% APR for the first 12 months; 4.75% – 6.22% APR thereafter
Compared to other banks, SunTrust offers a relatively low introductory interest rate for the first twelve months of your draw period. However, even after the introductory rate period is over, the company’s available APR range tends to skew lower than average. In addition, the maximum available line of credit it offers is higher than average at $500,000. Finally, SunTrust is a good choice for a HELOC because offers a unique benefit for its HELOC in that, as long as you keep the account open for at least three years, you won’t have to worry about paying closing costs on the loan.
Current interest rate:
- 4.15% APR to 8.45% APR
U.S. Bank has the largest potential for borrowing against your HELOC at a maximum of $750,000, but it’s important to remember that you may not qualify to borrow that much. You’ll be limited by the value of your home, how much equity you’ve amassed thus far and your creditworthiness. That said, if you have a large project to undertake, it’s nice to know that you have flexibility with U.S. Bank.
U.S. Bank is also one of the few lending institutions on the list to offer an interest-only HELOC, which can help you keep your payments low for the entire length of the draw period.
The Impact of .1% Change on $1,000
The interest rates on HELOCs are often variable, which means that you’ll want to do your research on how much the rate can increase and how large your payment will be if it reaches that maximum. While a 0.1% change in APR may not seem like a big deal, it can raise your monthly payment substantially.
For example, let’s assume that you borrowed $1,000 and are paying the money back over a 20-year period. A 0.1% change from a 4.9% APR would raise it to 5.0%, and it would increase your monthly payment from $10.56 to $10.61. While this slight payment increase may not seem that impactful, it can vastly affect your payments, especially over the long term. Let’s take a look.
At 4.9%, you’d be paying $49 in interest on a loan of $1,000 after one year. After three years, you’d have paid $147 in interest, and in five years time, you would have paid $245 in interest.
Now let’s switch that up to add in the .1% interest, taking us to 5%. After one year, you’d have shelled out $50 in interest on your $1,000 loan. After three years, that number would be $150 on your loan, and after 5 years, you’d have paid $250 in interest on your $1,000 loan.
Add in enough of those .1 increases and you’re going to be looking at quite a bit more in interest, which is precisely why it’s wise to shop around for the best rate on any loan, HELOCs included. With rates that range from as low as 3.49% to as high as 8.45% APR, you can’t afford not to.