Are promotional HELOC offers worth considering now? Experts weigh in

CBS News

5 days ago

Lenders looking to capture the interest of borrowers are rolling out promotional interest rates on home equity lines of credit (HELOCs) as a way to stand out in the current high-rate environment. Currently, average interest rates on a home equity line of credit (HELOC) are hovering around 8%. As the Federal Reserve continues its fight to lower inflation, interest rates on borrowing products remain elevated. While HELOC rates are still much lower than a credit card or personal loan, some lenders are offering below-average introductory rates, cashback incentives or waiving closing costs to entice borrowers to tap their home equity.
While promotional HELOC offers can be appealing, they may have some strings attached. If you're not careful, it could cost you more in the long run. We spoke with various home equity borrowing experts on what to consider before taking advantage of a promotional HELOC in today's climate and how to decide if it's worth it.
Start by seeing how low of a HELOC rate you'd be eligible for here.
Promotional HELOC offers can help you qualify for a lower introductory rate for a set period, typically six to 12 months. For example, you could qualify for a low APR of 3.99% to 5.99% for the first six months. Some credit unions may even offer lower HELOC rates as part of an introductory offer. As part of the promotion, there may be no annual fees or closing costs.
These enticing benefits can help get you in the door as a customer. As a borrower, taking advantage of a promotional HELOC offer can result in cost savings. Here's what to consider first:
If you're shopping around and find a promotional HELOC offer, evaluate the benefits. What are you getting out of it as a borrower? It could be a lower introductory rate and/or no closing costs. How much do you stand to save compared to other HELOC offers?
You'll want to weigh those benefits against any potential drawbacks, like loan minimums, prepayment penalties, or early termination fees. Some introductory rates may be compelling and offer obvious savings, whereas others may not be as competitive. You also want to think long-term when opening a HELOC and not just think about the short-term intro rate.
"I think they first of all have to figure out what the most important feature is for them. Do you get a better rate with a 5-year line of credit than you do with a 10-year line of credit? But are you prepared to start paying it back in 5 years? Are there prepayment penalties?" says Melissa Cohn, the regional vice president of William Raveis Mortgage.
Explore your current HELOC rate offers here to learn more.
All good things come to an end — and that's true if you score a super low HELOC promo rate. The introductory rate could last six to 12 months, based on your loan agreement. Once the intro period is over, your HELOC rate could jump significantly. To avoid any costly surprises, understand exactly how and when your HELOC introductory rate will change.
"Lenders are required to qualify you based on the fully indexed rate, not the teaser, which offers some protection. The key thing to look at with HELOCs is the margin. These loans are tied to prime plus a margin. So if prime is 7.5 percent and your margin is 2 percent, your actual rate is 9.5 percent. That is the rate you will be paying once the promo ends," says Jill Carrade, a mortgage broker at Pro Mortgage.
Home equity line of credit borrowing can be a smart alternative to other borrowing options. Homeowners can tap into their built-in equity and score a lower rate, instead of turning to credit cards. But you're still borrowing money that you have to pay back. It's essential to know how you plan on using the funds and how you'll repay what you borrow. If you know you can pay off your HELOC quickly, a promotional HELOC offer can be a bonus, as long as there are no prepayment penalties.
"Make sure your personal goals align with the product and purpose selected. If you are funding a short-term 12-month 100k kitchen renovation and know you'll get that bonus or cash windfall to pay a chunk off within a short time frame - take a low teaser rate and then pay the balance off before terms adjust or you hit the downside," says Christopher Thomas, a mortgage loan originator with Iris Mortgage.
Promotional HELOC offers are attractive. In this high-rate environment, getting a low interest rate, even for a short period of time, can make a difference. It's crucial to read the fine print, however, so your cost-saving efforts don't backfire.
"The other promotional item that a lot of home equity line providers offer is a waiving of closing costs," says Jason Lerner, branch manager at First Home Mortgage. "Typically, though, the fine print with that is that if someone repays their home equity line off or pays it down to 0 within a certain amount of time, or closes the account, often they have some type of prepayment penalty that then allows the lender offering the promotion to recoup some of those expenses."
You also want to make sure you meet the eligibility requirements for the promotional HELOC. Some financial institutions may only offer these promotional HELOC rates to existing customers. If you're not a current customer, you may be roped into opening additional accounts.
"Another practice is to require the consumer to open multiple other accounts in conjunction with the HELOC. The accounts could be credit cards, checking accounts and savings accounts. It is important to ask questions and thoroughly read all the paperwork," says Mark Worthington, a loan officer and branch manager at Churchill Mortgage.
Learn more about opening a HELOC online here.
Homeowners looking for financing may qualify for lower rates with a HELOC. Getting a promotional HELOC offer could provide even more savings, but only for a specific amount of time. It's key to read the fine print so you don't end up spending what you save on penalties or fees. Shop around and compare various options with different home lenders.
"I would focus on comparing apples to apples as much as possible. Isolate the same rate and adjustable or fixed term. Then compare the APR, fees, fine print, and any early payoff penalties," says Thomas.
You also want to be aware of potential repayment issues. HELOCs typically offer borrowers interest-only payments during the draw period. The rates are also subject to fluctuations as they're variable. Once you enter the repayment period, your monthly payments are likely to go up significantly. Some lenders may require a balloon payment when you hit the end of your loan term.
If fixed payments are easier for you, you can also look into a home equity loan. Home equity loan interest rates stay the same throughout your repayment term, making payments more predictable. Before tapping any home equity, have a plan, do your research, and compare offers to find the best option for your situation.