Housing prices across the United States have increased dramatically over the last two years. As housing prices rise, homeowners equity in their properties also increases. If you own a home, you might not realize that you can take advantage of the increased equity in your property through a home equity line of credit, or HELOC for short. Learn more about HELOCs, how they work and the pros and cons with Benzinga’s guide for beginners.
Best Home Equity Lines of Credit
The Best Home Equity Lines of Credit
Home equity lines of credit allow homeowners to unlock the financial power of their home’s equity to make home improvements, consolidate higher-cost debt or fund educational pursuits. A home equity loan can provide you with financial flexibility, as credit issued through HELOCs can be drawn down at will. Here are a few of the best lenders for HELOCs, graded on products offered, associated fees, time to close, loan-to-value ratio, application processes and additional qualifications.
1. Best for Homeowners With Limited Cash Flow: Unlock
Unlock home equity agreement (HEA) is not a loan. There’s no interest rate uncertainty and no monthly payments.
Homeowners often want to access home equity without the rigid requirements that come from traditional lenders. Unlock helps everyday American homeowners who have been left behind by the traditional home and finance system.
Unlock’s home equity agreement (HEA) is a shared equity financial product, and it is not a loan. Because of this Unlock is able to provide cash to homeowners that have lower credit scores, debt-to-income (DTI) limitations or other issues that could make it difficult to qualify for a debt based loan product. They typically have a 10 year term in which no payments are required. You can exit the HEA by selling the home, or buying back equity in small batches or all at once.
Unlock typically can serve homeowners that have credit scores as low as 500, and have flexible income requirements.
- They accept lower credit scores than normal (minimum 500 credit score)
- They can help fund you rather quickly
- This is not a traditional lender
2. Best for Low Fees: PenFed Credit Union Mortgage
With assets exceeding $25 billion, Pentagon Federal Credit Union, commonly abbreviated as PenFed, is the third-largest federal credit union in the United States. In addition to HELOCs, PenFed offers checking and savings accounts, credit cards, individual retirement accounts (IRAs) and other financial services. PenFed specializes in serving the military, but membership is open to all U.S. citizens and permanent residents.
PenFed offers HELOCs ranging in value from $25,000 to $1 million and allows customers the ability to switch from variable to fixed rates on all or some payments. For HELOC approval, PenFed requires a minimum credit score of 700, proof of income, one year of W2s, bank account statements and mortgage statements for all properties owned. To apply for a PenFed HELOC, you can call the toll-free number listed on its website or fill out an application online for preapproval.
PenFed’s maximum combined loan-to-value ratio (CLTV) is 80%, meaning that the value of all loans on the property, including primary mortgages, cannot exceed 80% of the total property’s value. Annual percentage rates (APRs) start at 8.75% on HELOCs, but your rate will vary depending on the specifics of your application. The average time to close is not listed on PenFed’s website, so be prepared to wait for your application’s approval.
- Range of low-down-payment options for first-time home buyers and offers HELOCs
- Based on the latest data, mortgage rates and fees are comparatively low compared to other lenders
- Rate lock with a fully underwritten preapproval while you are still in the process of shopping for a home
- You must provide contact information to see customized mortgage rates
- Doesn't offer certain types of mortgages
3. Best for Rate Discounts: Bank of America Corp.
Bank of America is the second-largest bank in the United States behind JPMorgan Chase and the second-largest bank in the world by market capitalization. Because you are rarely far from a Bank of America branch, this lender can be an appealing option if you are looking to sit down with a loan professional to learn more about your financing options before you sign onto a HELOC.
There is no fee to apply for a HELOC through Bank of America, and the company does not charge closing costs on lines of credit up to $1 million. On top of that, there are no annual fees and no fees applied if you convert your variable-rate balance to a fixed rate. Preapproval for a HELOC takes up to 10 days to process after the application is submitted, and it takes 30 to 45 days to close. Maximum CLTV for primary residences is 80%, and the minimum draw amount is $4,000.
Bank of America supports digital applications and has a mobile banking app that allows you to manage your payments and track your loan approval status on the go. If you are an existing Bank of America customer, your personal information will seamlessly populate in the application form for your HELOC. If you’re interested in calculating the costs of your Bank of America HELOC, visit the company’s website and use its home equity variable APR or home appraisal tools. Simply input some personal information, and the tools will calculate your interest rate.
- No annual fee
- Sample HELOC rates available online
- Rate discount for autopay with a BoA account
- Max. APR isn't available online
4. Discounts on Both Fixed and Variable Rates: PNC Bank
PNC has been lending for more than 100 years, and the company has branch locations in 17 states around the country. On top of wealth management, estate planning, auto loans and myriad other services, PNC offers HELOCs at competitive rates. PNC’s Choice HELOC comes with a number of unique benefits, including the flexibility to choose a fixed or variable rate and no hidden charges. However, PNC makes clear that a fee is applied every time you lock or unlock your interest rate for your HELOC.
You can analyze your would-be interest payments through PNC’s digital home equity tools and speak to a representative at any time if you need additional assistance. The application process starts online where you can compare rates after entering some personal information. To entice potential customers, PNC offers a 0.25% rate discount when you make automatic payments through a qualifying PNC checking account. If you meet PNC’s loan amount threshold and your HELOC contract closes in a certain window, you could be eligible for a cash offer.
Preapproval takes, on average, 20 to 30 minutes, and the time to close is typically 45 days. Borrowers must have a minimum credit score of 620 to be approved, and the maximum CLTV acceptable is 85%. Be prepared to pay PNC a $50 annual fee for your line of credit. PNC is certainly worth considering as a HELOC underwriter if you qualify for the rate discount or cash offer.
- Customizable sample rates are accessible online
- Rate discount available with autopsy from a PNC checking account
- Available for second homes in most states
- Charges annual fees
- Not available in all U.S. states
5. Fixed Rate Payment Options: U.S. Bank
With more than 80% of transactions and 65% of its loan sales now online, U.S. Bank has kept pace with technologically advanced financial services companies. U.S. Bank has a strong HELOC offering that includes no closing costs or application fees, competitive APRs and the ability to borrow up to $750,000 in value through a HELOC loan. However, U.S. Bank charges an annual fee of $90 after the first year of HELOC use.
U.S. Bank offers variable rates for HELOCs with the option to convert all or some of the outstanding loan amount to a fixed rate option. U.S. Bank has a simple three-step process for HELOC applications, and you can complete the application form online, over the phone or at your local U.S. Bank branch. After that, you can submit the requested documentation and, finally, close your HELOC at a U.S. Bank branch.
For primary residence HELOCs, funds are available after a waiting period of three business days once closing documentation has been signed. The loan-to-value limit for U.S. Bank’s HELOCs is 70%, and you must have a minimum credit score of 730 to qualify. Rates on HELOCs start at 5.7% APR. With low borrowing costs, many branch locations and several options for the application process, U.S. Bank is a top-notch HELOC provider.
- Sample HELOC rates available online
- Rate discounts on variable rate with option to convert to fixed rate
- Max. draw of $750,000 in most states
- Early repayment fees
Advantages of Home Equity Lines of Credit
A home equity line of credit can be an invaluable tool if you need quick cash to cover an unexpected expense. Some of the benefits that HELOCs provide can include:
Lower Interest Rate
Like credit cards, your HELOC will come with an interest rate listed in terms of your APR. HELOC loans tend to have lower APRs when compared to credit cards because they’re backed by the equity that you already have in your property. This means that when you take out a HELOC loan, you’re more likely to pay less in interest to your lender than if you’d put the same expense on a credit card.
Only Pay Interest on What You Use
Unlike a personal loan, you don’t need to borrow from your HELOC in a lump sum — you can only use as much as you need. This saves you money over time in interest because you’re borrowing less money.
No Limitations on How You Can Use the Money
Unlike some other types of financing options, you don’t need to tell your lender how you’re using the money when you take out a home equity line of credit. For example, when you take out an auto loan, you can’t decide that you’d rather use the money to pay down student loan debt after you get the money. With a HELOC, you can use the money for anything from covering routine bills during a period of financial instability to renovating your kitchen. There are no limitations on how you use the money.
Refills as You Need It
Also like a credit card, you can access your HELOC over time as you need it so long as you continue to pay your balance. This provides you with a more flexible financing option, as you can access it multiple times as you need access to extra household funds.
Things to Consider With a Home Equity Line of Credit
While a HELOC loan can provide you with a flexible option for financing life’s major purchases and expenses, it comes with a few considerations you’ll need to know as the homeowner. Here are a few things to consider before you sign on the dotted line.
Higher Rates Than a Mortgage Loan
While APRs on HELOCs are lower than those that you’ll find on credit cards, they are higher than mortgage rates. If you have a mortgage loan currently, expect to pay a higher interest rate than your current loan if you decide to take a HELOC.
Backed by Your Home
In order to qualify for a HELOC, you must offer your home as collateral. This means that it’s possible to lose your home if you cannot repay your HELOC according to the terms of your agreement. While a single missed payment on a HELOC won’t result in the sheriff knocking on your door, regularly missed payments come with a serious risk of losing your home to foreclosure.
Can Lead to Overspending
When you take out a HELOC, you’ll first enjoy your loan during the draw period. During the draw period, you’ll only need to make interest payments on the amount of money that you borrow. This means that you can essentially spend up to your HELOC’s limit while also making minimum payments equal to a small amount of accrued interest.
Unfortunately, your draw period won’t last forever. After the draw period ends, you’ll need to begin making minimum regular repayments on the amount of money you owe, plus accrued interest. If you don’t zero your balance between months, interest will continue to compound on the amount you owe, causing you to pay more.
You May Need to Pay Closing Costs Again
Just like when you refinance, there is often a closing process involved with opening a HELOC. Though some lenders have gotten rid of HELOC closing costs, some lenders may charge between 2% and 5% of your line of credit balance in order to finalize your loan access.
The bottom line? While HELOCs provide you with fast access to cash, you’ll need to be sure to monitor your balance and use funds responsibly. If you’ve had problems managing your spending with credit cards in the past, it might not be a good idea to take a HELOC. Unlike a credit card, your HELOC loan is backed by your home. If you fail to make payments on your HELOC, you could run the risk of losing your home to foreclosure.
Choosing the Right HELOC Lender
Choosing the best HELOC lender is a decision that can greatly impact your financial situation. Remember to consider factors such as interest rates, fees, customer service, and reputation when selecting a lender. By doing thorough research and comparing different options, you can find a lender that meets your specific needs and provides you with the best terms and conditions for your home equity line of credit. Always carefully review all terms and conditions before making a final decision, and consult with a financial advisor if needed.
Frequently Asked Questions
Should you take out cash with a home equity line of credit?
You may want to take out cash with a home equity line of credit if you own your home and you need quick funds to cover an unexpected expense. HELOCs have lower interest rates when compared to credit cards, which means you’ll pay less over time repaying the money that you borrow. However, HELOCs use your home as collateral, and you must already have equity in your home to get one. Be sure to consider all of these factors before you decide that you should take out cash with a home equity line of credit.
Can you refinance a HELOC?
Yes, you can refinance a HELOC. However, in order to qualify, you must have a great credit score, as HELOC refinances are granted less often than mortgage refinance requests. Depending on the lender, you might have to prove that you’re in extenuating financial circumstances in order to qualify for a refinance.
What is a good rate on a HELOC right now?
The rate on a Home Equity Line of Credit (HELOC) will vary based on your individual credit score, the current rate environment, and the amount of money you are looking to borrow. Generally speaking, good rates on a HELOC start at around 4.00% and can go all the way up to 8.00%.
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About Sarah Horvath
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