Understanding Home Equity Line Of Credit Rates

A home equity line of credit is a financial product that uses the value in your home as collateral for a line of credit that you use however you want and whenever you want. The value in your home is defined as the value of your home minus the remaining cost of your mortgage.

In many cases a lender may offer you a line of credit equal to 120% of the value of your home depending on your credit score and other loan deciding factors. Many people take out an equity line of credit to pay for large debts such as a child’s college education or an extensive remodeling of their home. A home equity line of credit is one of the most available financial products a homeowner has access to but it is important to understand how the home equity line of credit rates work before getting yourself involved in a large commitment.

First and foremost any lender will tell you that a home equity line of credit should be treated as a short term loan. You should not get a home equity line of credit with the intention of paying on it for 10 or 15 years. A home equity line of credit should only be around for maybe 3 or 4 years before it is paid off in full. One of the reasons for this is the volatility in the home equity line of credit rates.

A home equity line of credit is what is known as a variable rate mortgage product which means that the interest rate on a home equity line of credit can fluctuate up or down depending on the bank’s rates and the prime lending rate. It is possible to get a home equity line of credit rate that is akin to your fixed mortgage rate and that is a number you can probably pay with ease every month. But be warned that variable rates can fluctuate wildly and some have caps as high as 21%. So if you are used to paying a monthly payment at 6% and suddenly it shoots up to 10% then you may find yourself unable to pay your home equity payment.

Some lenders allow you the ability to negotiate a maximum increase and decrease for your home equity line of credit prior to signing the agreement. In some cases you may be able to negotiate an agreement that only has a two or three point jump over a fixed period of time which would reduce the pressure, and decrease the anticipation over an unaffordable home equity payment, a great deal. Ask your lender about all of the different clauses that can be added to your home equity agreement prior to signing the agreement and get the best possible home equity interest rate agreement that you can.