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How Often Can HELOC Interest Rates Change?

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A sudden car repair or a leaky roof in your home can present challenges to your budget. It'd be easy for you to reach for a credit card; however, with interest rates well over 20% for some cards, this is a less-than-ideal way to cover unexpected emergencies. (Savings Tip: The interest rate on credit union credit cards is capped at 18%, unlike cards from banks and retailers.) If you own your home, there may be another option - a home equity line of credit (HELOC).

First, you should understand what a HELOC is and how they work. Next, you should know how often the interest rates can change on a HELOC in a rising rate environment like we are in today. The good news is that HELOC rates in Florida are still quite competitive.

What is a HELOC?

A HELOC is a revolving line of credit secured with the equity in your home. You can borrow, up to a limit, pay it back as you’re able, and then borrow again if the need arises. The equity in your home is the difference between your home’s market value and any first-mortgage balance you have.

Some credit unions will let you borrow 80% of the equity in your home. Terms will vary between different borrowers, however, a HELOC will generally allow a period where you can draw on the loan borrow, and then a period where borrowing is no longer permitted, and you must repay the loan.

For example, you may be allowed to borrow for 10 years, the loan will freeze, and you will have to make payments each month for 15 years. It may also be possible to refinance the balance after the draw period. Understanding how often the interest rate can change on a HELOC is essential. HELOC rates in Florida, and all over the country, have risen with first mortgage rates; however, they’re still usually lower than credit cards or personal loans.

Applying for a HELOC will be like other loans. Lenders look for a good credit score, low debt-to-income ratios, job security, and a history of payments that were submitted promptly. While a home equity line of credit will often require an appraisal, the process is generally not as drawn out as your first mortgage loan experience.

How can a HELOC be used?

A HELOC can be used for many different types of purchases. A common reason to borrow against your home’s equity is for a major remodel or an emergency repair, such as a new roof. A recent report suggests that the median cost of a kitchen remodel is nearly $35,000. Many families don’t have that kind of cash in their account, so a loan is a flexible option to finance your home renovations. Interest rates on a home equity line of credit are often relatively low, often comparable to a first mortgage. Even as rates rise, a HELOC is still likely to carry a lower rate than credit cards or personal loans.

Another frequent reason to use a HELOC is for a sudden emergency that requires financial attention. Homeownership can be expensive, and when you need a new roof, or your air conditioning breaks down, there is no time to lose. A HELOC allows you quick funding that won’t cost you thousands of dollars in high interest, especially when you understand how often the interest rate can change on a HELOC.

Many financial planners would add a word of caution, as home equity lines of credit aren’t without risk, and it’s important to remember that failure to pay your loan back could lead to losing your home, whereas that is not the case with credit cards or personal loans. This is another reason it is crucial to understand how often interest rates can rise with a home equity line of credit. Be sure you can afford the worst-case scenario payment.

How will my rate be set?

As rates rise, it is essential that you understand how your rate will be set and what that could mean for your future payments. Borrowers should always ask a lender how often the interest rate can change on a HELOC. Most HELOCs are variable-rate loans, meaning the interest can change at some point. Most commonly, the rate will have two components: the first component will be some base rate, usually a benchmark rate.

A standard benchmark is the Prime Rate. As the benchmark rate goes up or down, HELOC rates in Florida and around the country will adjust as well. The second component will be a margin on top of the benchmark. The margin is the markup the lender adds. The margin amount will depend on your credit profile. The better your credit the less of a markup typically.

Many HELOC product rates can change as often as monthly, impacting both your rate and your payment. There is usually a cap on how high your rate could go; however, borrowers should be sure they can afford the loan if interest rates rise rapidly and understand how often the interest rate can change on a HELOC.

If a home equity line of credit sounds like it may be the right product for your needs, consider contacting one of our trusted advisors today. They are happy to explain how often the interest rate can change on a HELOC and current HELOC rates in Florida. Power Financial Credit Union offers competitive rates and flexible terms and lets you borrow up to 80% of your home’s equity.

Before your next big purchase or remodel, contact Power Financial Credit Union.