How Are Home Equity Lines of Credit Effected?
Home equity lines of credit, also known as HELOCs, are lines of credit available to homeowners. The lines of credit are secured by the equity that the homeowners have in their homes. Homeowners draw against these lines of credit in the form of loans. Generally, home equity lines of credit are drawn at a variable rate. This interest rate can be affected by a number of different factors.
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Credit Rating
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The main factor that will affect the interest rate for a HELOC is the borrower's credit rating. Generally, finance companies that issue HELOCs will examine whether a person has paid back his debts on time. Borrowers who have a record of paying back their debts on time will generally receive lower rates than people who have not, allowing them to save money on interest payments.
Prevailing Interest Rates
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HELOC interest rates are usually variable, meaning that the rate will fluctuate based on the level of interest rates in the wider lending market. So if a person's HELOC is pegged to prevailing rates -- say, for example, his rate is two points above the prime rate -- then as interest rates go up, his interest rate will go up, too.
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Late Payments
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Sometimes, a HELOC contract will include penalties if a person fails to pay back the loan on time. These penalties may take the form of fees attached to the principal of the loan, or in some cases they may include punitive interest rates on the loan.
Lender Policies
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The criteria that a lender uses to determine the interest rate will vary greatly, depending on the lender's idea of what constitutes creditworthiness and his own business model. For example, one lender may give greater weight to an individual's creditworthiness, while another may choose to keep interest rates relatively consistent with the prevailing rates of interest on the market.
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