HELOC dos and don'ts to know as rates keep falling
No matter how much money you borrow or the funding source you choose, your approach should always be a strategic one. This applies to everything from personal loans to credit cards to larger loans like mortgages. When borrowing from your accumulated home equity, however, it's even more important to approach the process cautiously. When you use a home equity line of credit (HELOC), for example, you could easily lose your home back to the lender if you become unable to make the monthly payments as agreed upon. So it's critical that you know what you can and can't afford before getting started.
Fortunately, this calculation is easier to complete now that HELOC interest rates have been steadily declining. Down around two percentage points just in the last six months, a HELOC offers homeowners a cost-effective way to potentially borrow a large sum of money right now. But with rates consistently falling on this product and uncertainty over the larger rate climate still a concern, interested borrowers will need to know how to carefully navigate the HELOC borrowing process now. Below, we'll detail a few important important HELOC dos and don'ts to know as rates keep falling.
Start by seeing how low of a HELOC interest rate you could qualify for here.
HELOC dos and dont's to know as rates keep falling
Here are four critical HELOC dos and don'ts to know right now that rates are declining again:
Do: Apply with good credit
Today's lower HELOC interest rates won't mean much if you apply for a line of credit with a subpar credit score. So make sure you've done all you can to boost your credit score in advance. That means reviewing your credit report for errors, paying down debt as much as you can now, and improving your debt-to-income ratio to make yourself as attractive as possible as a borrower. By doing so in advance of an application, you can make better use of your time and improve your chances of securing a low-rate HELOC.
Review your current HELOC options online now.
Don't: Wait for rates to fall further
Waiting for HELOC rates to decline further isn't necessary. With a variable rate subject to change based on market conditions (it changes monthly for borrowers) your HELOC rate will adjust independently should rates rise or fall in the future. Waiting for an optimal time to act, then, isn't necessary as it would be with a fixed-rate home equity loan, for example. So, if you know you want to use a HELOC and can qualify for a low rate, it makes sense to start sooner rather than later.
Do: Calculate your repayment costs
A consistently declining interest rate, as exciting as it is, shouldn't cloud your financial judgment. Remember that HELOCs use your home as collateral so you'll want to be completely prepared to make your repayments. Consider using this decline in rates, then, as a smart time to calculate your future repayment costs against a series of different, realistic rate scenarios to determine your exact ability to pay. If unsure, consider a home equity loan instead, which has a slightly higher rate that will remain fixed until refinanced.
Don't: Use most alternatives
It's understandable if you'd prefer to refrain from borrowing your home equity. But most alternatives are simply not as cost-effective right now. A HELOC is better than a personal loan for most, considering that the latter has an interest rate many points higher. Credit card rates, meantime, are near record highs. And home equity loans, while employing fixed interest rates, are a bit more expensive right now. So, while it may be worth exploring alternatives, it doesn't make financial sense to use most other options as a HELOC continues to become more affordable.
The bottom line
A HELOC has timely advantages for borrowers right now, but to truly take advantage, interested homeowners will need to know the appropriate dos and don'ts tied to the lending product. By understanding these items and strategically applying them to their unique home equity borrowing scenario, they can better ensure that future repayments are affordable and that the funds will be used in an appropriate and valuable way.
