Published July 26, 2024

Rate Showdown: Why HELOC Rates Are Lower than Personal Line of Credit Rates

Executive Vice President/Head of Marketing

What's in the Article

What is a HELOC?
HELOC example
What is a personal line of credit?
Differences between HELOCs and personal lines of credit
Why HELOC rates are lower than personal lines of credit
Secure competitive HELOC rates with HomeEQ

Are you eyeing some extra cash flow to help fix up your house or for another significant purchase but are puzzled by the credit options available?

Let’s discuss why HELOC rates often outperform personal lines of credit and why HELOCs are smarter for many homeowners looking to manage debt or fund big-ticket home improvements.

What is a HELOC?

A home equity line of credit, also known as a HELOC, is similar to a credit card but functions more like a second mortgage tied to the value of your home.

Imagine you have a credit card with a spending limit set by the bank. Instead, your limit is based on the value of your house minus any amount you still owe on it. 

That’s essentially what a HELOC is—a flexible way to borrow money using the equity you’ve built up in your home as the credit limit.

How does a HELOC work?

HELOCs have two main phases—the draw period and the repayment period.

During the draw period, you can borrow money up to your limit, pay it back, and then borrow again, just like a credit card. This period usually lasts about 10 years. 

After that comes the repayment period, during which new borrowing stops, and you start paying back the balance over a set number of years.

What makes HELOCs special is that they’re secured by your home. This means that if you can’t pay back the money, you could lose your house. 

Because this security lowers the risk for lenders, you often get lower interest rates compared to unsecured loans, like personal lines of credit.

The Federal Reserve’s Interest Rates Page offers detailed insights into current interest rate trends that impact HELOC rates.

Access cash within days

Tap into your home’s potential in minutes. Start our streamlined digital application to discover if a HELOC is right for you.

Key points about HELOCs

HELOC example

Imagine owning a home valued at $300,000, and you still owe $200,000 on your primary mortgage. 

Here’s how a HELOC would work for you:

  1. Calculate your equity: Your home equity is the current value of your home minus what you owe on your mortgage. So, $300,000 – $200,000 = $100,000.
  2. Determine your credit limit: The lender allows you to borrow up to 85% of your home equity. So, 85% of $100,000 = $85,000.
  3. Access to funds: You now have a HELOC set up with a limit of $85,000. You can borrow from this line of credit anytime, pay it back, and borrow again, just like using a credit card.

Home renovation scenario using a HELOC

What is a personal line of credit?

A personal line of credit is a flexible financing option similar to a credit card. It allows you to borrow money up to a set limit, only paying interest on what you use, not the entire available amount. 

This credit line is typically approved based on your credit score, income, and financial history.

This is typically ideal for people with good credit who need access to funds without using their home as collateral. However, the interest rates are usually higher than those of a HELOC.

Scenario using a personal line of credit

A personal line of credit is particularly useful for those who anticipate various expenditures over time and value the convenience of ready access to funds without the immediate need to draw on them.

Suppose you’re approved for a $50,000 personal line of credit. You plan to undertake several home improvement projects over the next year, including updating your kitchen and landscaping the backyard.

While you don’t need the funds immediately, having the credit line ready ensures you can manage costs as they come without delays.

Advantages of personal lines of credit

Differences between HELOCs and personal lines of credit

Here’s a straightforward chart comparing HELOCs and personal lines of credit. 

It highlights the essential differences between the two, focusing on security, interest rates, repayment terms, and potential tax benefits. 

This will help you quickly understand which option suits your financial needs better.

FeatureHELOCPersonal Line of Credit
SecuritySecured by home equityUnsecured
Interest RatesLower (due to being secured)Higher
Repayment TermsDraw period followed by a repayment periodFlexible, often no fixed term
Potential Tax BenefitsPossible tax deduction from home improvementNone

Why HELOC rates are lower than personal lines of credit

HELOC rates are lower primarily due to the secured nature of the loan, stringent eligibility requirements, and the substantial credit limits based on the home equity, all contributing to reduced risks for lenders.

Reasons for HELOC rates being lower

Secure competitive HELOC rates with HomeEQ

While personal lines of credit and HELOCs offer revolving credit, the underlying differences in interest rates and credit requirements are significant. 

HELOCs generally offer lower interest rates due to the home equity serving as collateral. However, they come with the risk of losing your home if you default. 

Personal lines of credit are more accessible but typically come with higher interest rates. 

Ultimately, the best choice depends on your financial situation, creditworthiness, and specific needs. Carefully considering these factors will help you determine the right option for you.

HomeEQ’s streamlined digital application process makes applying for a HELOC easier than ever. 

Our competitive HELOC rates and quick turnaround for funding make HomeEQ the ideal choice for boorrowers. Get started on your HELOC application today!


Further Reading

Unlock your home’s potential

Access cash from your home within days. Try our streamlined digital application to discover if a HELOC is the key to your financial success. Get started to see your personalized offer.
Back
To Top