How to qualify for the lowest current home equity line of credit rates

Before looking for the lowest current HELOC rates, note that you need to have enough home equity to qualify for a HELOC.

Home equity is the percentage of your home's value that you own outright. To calculate your home equity, subtract the amount you still owe on your mortgage from the total current appraised value of your home.

While qualifying for a HELOC requires existing home equity, good credit scores, and a low debt-to-income (DTI) ratio, getting the lowest current HELOC rates comes with stricter requirements.

Beyond these factors, finding the lowest current HELOC rates can also depend on the lender you choose, the terms of the HELOC, and external market factors.

What is a low HELOC interest rate?

Because HELOC rates vary based on many factors, and because rates can change overnight, there is no set-in-stone "low" HELOC interest rate. 

For example, while an interest rate of 9.5% might be relatively low today, the same rate could be considered incredibly high in the future. Similarly, a 9.5% interest rate could look even lower by comparison if rates increase in the future.

So, while a HELOC rate might look good to you today, external factors could impact what a low HELOC rate is in the future. Fluctuating rates are normal, so if you're ready to get a HELOC, home equity loan, or similar mortgage, you might not want to wait too long for rates to drop because they could take years to do so

Typically, qualified homeowners with higher credit scores and lower DTI ratios will be able to get the lowest current rate.

READ MORE: How to qualify for a home equity loan

Keep in mind that while meeting these qualifications may help you get the lowest current possible HELOC rate, there is no guarantee that you will receive the absolute lowest current rate available.

It is important to compare offers from multiple lenders to find the best deal for you.

Factors that lead to low HELOC interest rates

Several factors contribute to helping lenders determine what HELOC interest rates they will offer to borrowers. Some of the most important factors include the following:

Credit score

Credit scores are one of the most important factors lenders look at when deciding whether to offer a HELOC and at what rate.

A high credit score indicates that you are a low-risk borrower. This means that lenders are more likely to think you will repay your loan on time, and so they will typically offer you lower rates.

Maintaining a good or great credit score  could help you qualify for the lowest current HELOC rates. Paying bills on time, keeping a low credit utilization, and having open lines of credit – including a mortgage – may help improve your credit score.

Income

Your income is another important factor that lenders look at when deciding whether to offer a HELOC and at what rate. A high income indicates that you could afford your monthly payments, potentially leading to lower HELOC rates.

Aside from your primary source of income, you  could find a secondary source to increase your total income. This  may help lower your potential HELOC rates even further.

Debt-to-income ratio 

Debt-to-income (DTI) ratio is the difference between your total debt obligations and income. For example, if you earn $5,000 a month and have $1,500 in monthly obligations (including your current mortgage payment), then your DTI would be 30%. Typically, lenders like to see a DTI ratio of 43% or lower, with lower DTI ratios potentially getting access to better rates.

You could improve your DTI ratio by paying off existing debts or by increasing your income.

Loan-to-value ratio

Lenders also look at your loan-to-value (LTV) ratio when determining HELOC rates. Your LTV ratio is determined by dividing your current loan balance by the current appraised value of your home. For example, a home with a value of $350,000  and  a $250,000 mortgage would have an LTV ratio of 71%. As with DTI, lower LTV ratios may mean lower HELOC rates.

Federal interest rates

The Federal Reserve's Federal Funds Rate is one of the most important factors that impact HELOC rates.

When the Funds Rate goes up, HELOC rates also typically go up. This is because lenders need to adjust the rates they offer to match changes made by the Federal Reserve. 

Higher Federal Funds rates will likely mean higher HELOC rates in the near term. When economic conditions improve, the Fed will likely lower their rate, leading to lower HELOC rates.

Will HELOC interest rates go lower or higher? 

In an economic environment where the Federal Reserve is fighting inflation, signs can suggest higher HELOC rates. However, just because average HELOC rates could move higher doesn’t mean that the rate available to you will keep increasing.

One factor of HELOCs to keep in mind is the variable interest rate. Because HELOCs usually come with variable interest rates, the interest you pay on a HELOC could change.

If rates trend higher, that will likely mean higher monthly payments. If rates drop over time, you could end up saving money as the HELOC rate changes.

Trying to time increases and drops in interest rates can be a tricky game. It's impossible to predict exactly when interest rates will go up or down, so it may be best to focus on factors you can have an impact on like your credit score and DTI.