When shopping for a Home Equity Line of Credit (HELOC), advertised rates only tell part of the story. A HELOC is a variable, revolving line of credit where loan structure and fee terms dictate total borrowing costs.
1. Interest Rate: Index + Margin
HELOC rates are variable and calculated using:
- Prime Rate: Base index tied directly to Federal Reserve rate changes. Every lender uses the same index. You can track the current rate and 10-year historical rate movements via our U.S. Prime Rate History page.
- Margin: The fixed percentage added to or subtracted from Prime. This is the metric you shop. (e.g., Prime + 0.50% vs. Prime + 1.25%).
- Blended Cost of Capital: If you are utilizing a HELOC to consolidate debt, calculating your combined effective rate is critical. You can model your blended borrowing rate with this Weighted Average Interest Rate Calculator.
Watch for two common rate features that affect long-term cost. Many lenders advertise temporary teaser rates that start lower for a short period (often six to twelve months) before rising to the fully indexed rate of Prime plus your margin. In addition, most HELOCs include a rate floor—the lowest interest rate that will apply even if the Prime Rate falls further—so confirm both the teaser expiration and the floor when comparing offers.
Margin Pricing Factors
- Credit Score (FICO)
- Combined Loan-to-Value (CLTV): (First Mortgage Balance + HELOC Line) ÷ Home Value
- Credit Line Amount: Tiers vary by size (e.g., $250k+ vs. $50k)
- Occupancy: Primary residence, second home, or investment property
2. Draw Period vs. Repayment Period
- Draw Period (3 to 10 Years): Revolving borrowing window.
- Repayment Period (10 to 20 Years): Credit line closes to new draws; remaining balance amortizes fully.
3. Payment Structure
- Interest-Only (IO) During Draw: Most common. You only pay the interest that accrues each month on the outstanding balance.
- Principal & Interest During Draw: Some programs require monthly principal amortization or a fixed percentage of the balance (e.g., 1%–2%).
4. Closing Costs
| Fee Component | Typical Range |
|---|---|
| Origination Fee | 0% to 2.5% of line amount |
| Lender-Related Fees | $1,200 to $1,600 |
| Appraisal Fee | $0 to $650 |
| Title & Recording | $250 to $1,200 |
| Annual Maintenance Fee | $0 to $100/yr |
5. Early Draw Windows & Early Termination Fees
- Initial Draw Requirement / Early Payment Window: Lenders may require an initial draw at closing held for a set period (e.g., 6 months) to qualify for specific pricing.
- Early Termination Fee: Can be a fixed fee or a percentage of the credit line, active for 1 to 3 years.
You can pay your balance down to $0 without penalty after the early payment window; the early termination fee only triggers if you close the account during the early termination period.