Bethpage Federal Credit Union: The Evolution of HELOCs


NEW YORK, May 10, 2022 (GLOBE NEWSWIRE) — A HELOC (home equity line of credit) is an open line of credit, where the borrowing limit is based on the homeowner’s available equity and financial health. HELOCs tend to have lower interest rates than unsecured personal loans or credit cards and offer greater borrowing flexibility than other types of home equity loans.

The HELOC interest rate is derived from:

  1. homeowner’s personal credit, debt and income

  2. the amount withdrawn or borrowed, and

  3. the relationship between their current mortgage balances and the estimated value of their home, or loan-to-value (LTV) ratio.

Usually, HELOC interest rates tend to be variable (often based on the federal interest rate) and can change each time an individual borrows funds during the draw period.

However, the HELOC variable rate is changing. Now a homeowner can take advantage of a fixed rate HELOC option.

Why most HELOCs offer a variable rate

Since lenders cannot know how much of a HELOC’s borrowing limit will be taken out, a variable rate allows lenders to set the rate based on the amount borrowed to control risk. Higher HELOC borrowings can accommodate higher interest rates and where borrowers choose not to take out their full borrowing limit, lenders can apply an interest rate corresponding to the lower risk taken.

Of course, a variable rate is also often pegged to measures of the national economy – as Fed rates go up, so do variable rates. This practice ensures minimal risk to the loan over longer terms, when savings can change more dramatically. Of course, when a variable rate HELOC is compared to the fixed rate of a home equity loan, many HELOC lenders will offer more competitive rates for similar loan amounts, knowing that the variable rate offers flexibility.

With the combination of the moving level of borrowing, for a long time variable rates seemed the most sensible way for lenders and borrowers to allocate appropriate levels of interest against a line of credit.

Benefits of a Fixed Rate Loan Option

In addition to providing predictable monthly payments, a fixed rate HELOC can protect a homeowner against rising federal rates.

More and more lenders are allowing the conversion of part or all of a HELOC balance into a fixed rate loan, providing borrowers with stability in rates and monthly payments. The emergence of this rate conversion option makes HELOCs even more attractive, as they can start out with the borrowing flexibility to meet a fluctuating budget need, but offer the stability of a fixed rate loan.

Lenders will offer this fixed rate HELOC option at closing, during the draw period or even during the HELOC repayment period.

Uses for a HELOC

While HELOCs are traditionally viewed for their flexible borrowing options, the addition of the fixed rate option to HELOCs makes them attractive forms of equity financing in a rising rate economy. Beyond these flexible options, HELOCs allow borrowers to use funds however they choose. Although borrowing HELOC for home improvements may qualify for interest payments for tax deductions, there are no restrictions on how a HELOC can be used. The most popular options include:

Study cost

Because tuition and room and board can fluctuate each year, HELOCs can minimize withdrawals to meet needs. And HELOC borrowing limits are dictated by available home equity, which can help borrowers meet the costs of rising tuition fees.

Home improvements

HELOCs are a natural fit with home improvements – both because of eligibility for tax deductions on interest paid for the HELOC and because home improvements can increase the value of one’s home, which can help build more fairness.

Personal expenses

From weddings to vacations, HELOCs offer substantial borrowing that can be funded with affordable monthly payments. With interest rates generally improving with financing through credit cards or personal loans, borrowing costs can be reduced.

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