How Is My HELOC Rate Calculated?
Typically, HELOCs are adjustable-rate loans, and like many adjustable rate loans are tied to an index such as the U.S. Prime Rate, which is set by the U.S. Federal Reserve. Your rate will therefore be subject to change based on the index, and will increase or decrease when the index rate does. Lenders typically charge the index rate plus a "margin," for example two percentage points. In this case, your interest rate could be calculated by checking the index rate and adding 2%.
Your payments will therefore increase when interest rates go up. This can end up being very costly over the long term, and if interest rates increase significantly enough, your monthly payments could even double.
However, HELOCs, like other adjustable-rate loans, are required to have a cap on the maximum interest rate. The HELOC interest rate cannot increase beyond that cap even if the index interest rate to which it is tied does increase beyond that level. Some HELOCs have periodic caps, which adjust over time but limit the amount that interest rates can increase over each period. These periodic caps can help prevent sudden sharp jumps in interest rates, and in turn will prevent you from failing to make required payments due to a sharp jump in your interest rate.
HELOCs can also feature low initial rates that are not tied to an index, and that will be fixed for a certain period. For example, your HELOC's initial rate could be held at 2% over the course of several months, before increasing to match the standard rate plus the applicable margin.
- What Is a Home Equity Line of Credit (HELOC)?
- How Much Does a HELOC Lower My Interest Rate?
- Should I Choose a HELOC or a Home Equity Loan?
- How Does a HELOC Work?
- What Are the Benefits of a HELOC?
- What Are the Drawbacks of a HELOC?
- What Are the Most Common Reasons to Use a HELOC?
- How Much Can You Borrow Using a HELOC?
- What Are the Requirements to Take Out a HELOC?
- Should I Use a HELOC to Lower My Debt Payments?