Information About Home Equity Interest Rates

Introduction

Whenever you get home equity interest (a.k.a. HELOC) you will be using your home as collateral. This is a secured line of credit (one in which you have put collateral down that the bank can take off of you if you ever fail to make payments). There are several different types of HELOC. Each of them charges a different interest rate.

 

Types Of HELOC

There are essentially 2 different types of home equity interest loans. It is important to know what they are and what the difference between them is. Only then will you be able to decide which is best for you and your situation.

First, there is the home equity line of credit. With this type of home equity interest loan you will have a line of credit that you can draw against whenever you want. While you are given a certain amount of money, you will only pay interest (not a fixed rate) on the amount of money that you actually use. This money is accessed via a check or credit card for this specific account. It is tax deductible but there is an annual fee that some lenders may waive.

Secondly, you can take out a home equity interest loan that is known as a second mortgage. Herein you’ll receive a lump sum of money, a fixed interest rate and fixed monthly payments too. There is no annual fee. You also cannot simply draw upon this money as needed.

 

Information About Interest Rates

The lender that you receive your home equity interest from will calculate your interest rate by taking the U.S. prime rate (a.k.a. the Treasury Bill rate) and then adding a percentage to that interest rate. This additional percentage is known as the margin. The amount of the margin will vary depending upon your credit history (those with a good credit history will obviously pay less than those who have a bad credit history). Regardless, it is important for you to understand that the interest rate on your home equity interest is variable.

Now that you know that the home equity interest loan’s interest rate is variable, it is vital to understand what this means. To begin with you should know that whenever a lender writes a home equity interest loan they will peg the variable interest rate against the U.S. prime rate (a.k.a. Treasury bill rate). This interest rate will change depending upon the movement of this interest rate. Whenever this rate increases or decreases, the interest rate on your home equity interest loan is going to move in the very same direction.

 

It is important to mention that there are also some convertible HELOCs. These loans will actually charge you a variable interest rate for a specifically stated period of time. Once you are beyond the stated period of time, you will be able to convert your variable rate HELOC into a fixed rate loan. This can be a lot like gambling but in the end it is quite possible for you to come out ahead with a much lower interest rate.

 

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