How to get today's best HELOC rate

It currently costs a lot more to borrow money than it did last year. The Federal Reserve has taken steps over the last 12 months to temper inflation, resulting in numerous rate increases. And, with the Fed's benchmark rate now at its highest point in 22 years, interest rates on loans and credit cards are much higher than they once were. 

But there are still a few good options for borrowing. And if you're a homeowner, you may have one at your fingertips via your home equity. Home equity levels have been increasing nationwide, and while there are numerous ways to borrow from your home's equity, one of the best is with a home equity line of credit (HELOC).

HELOCs work like a line of credit rather than a lump sum loan, allowing you to borrow from that line of credit for a specific period of time. This offers lots of flexibility to borrowers — and when used for certain purposes, there are also potential tax benefits. But to truly maximize the benefits of a HELOC, it's important to secure the best interest rate possible.

Get started and find out what home equity loan rates you may qualify for here.

How to get today's best HELOC rate

It can help to do the following if you want to get the best interest rate possible on your HELOC:

Have a strong credit score and financial profile

Lenders determine whether you're creditworthy by looking at your credit score and financial history. A strong credit score demonstrates your ability to manage debt responsibly. To enhance your chances of securing a competitive HELOC rate, maintain a healthy credit history by paying bills on time, keeping credit card balances low and managing your existing debt load effectively.

If your score is slightly lower than it could be, you may want to hold off on applying for a HELOC until you've taken steps to improve it. Even a few points could mean the difference between a top HELOC rate and one that costs you a lot more in the long run.

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Shop around for lenders

Just as you would when buying a home, shopping around for lenders is essential when seeking a HELOC. Different lenders might offer varying rates, terms and fees — so don't settle for the first offer you get.

Request quotes from multiple financial institutions and compare the offers to identify the best overall deal. And, don't be afraid to get quotes from credit unions or online banks in addition to brick-and-mortar financial institutions. In some cases, you could snag a much lower rate from these types of lenders, which can make the extra work worth it.

Lower your loan-to-value ratio

Lenders often use the loan-to-value (LTV) ratio to assess risk. This ratio compares the amount of your requested credit line to the appraised value of your home. The lower your LTV ratio is, the less risk the lender takes on — which is why this matters when trying to get the best rate on a HELOC. 

To secure a better HELOC rate, strive for a lower LTV ratio by paying down your mortgage or benefiting from property value appreciation. Or, if you have a high LTV and can't afford to pay down your mortgage immediately, it might be worth waiting to apply until you've built more equity in your home.

Opt for a shorter draw period

The draw period is the duration during which you can access funds from your HELOC. Some lenders have firm draw periods for all borrowers, but others may allow you to choose your draw period instead. If you use a lender with draw period flexibility, a longer draw period may seem appealing due to their extended availability. However, they often come with slightly higher interest rates. 

On the other hand, opting for a shorter draw period may help you secure a more favorable interest rate. Just make sure that you won't need access to the line of credit for longer than the draw period affords, or you'll be back at square one in terms of borrowing.

Maintain a strong debt-to-income ratio

Your debt-to-income (DTI) ratio is a measure of how much of your monthly income goes toward debt payments. Lenders generally prefer a lower DTI ratio, as it signifies that you have a manageable level of debt relative to your income. 

Keeping your DTI ratio in check can make you a more attractive borrower and improve your chances of securing a competitive HELOC rate. To lower your DTI, try to pay off other types of debt, whether it's a car loan, credit card debt or something else entirely. Doing this prior to applying for a HELOC can help you get the best rate possible for your situation.

The bottom line

Obtaining the best HELOC rate demands a combination of financial discipline, research and strategic decision-making. By maintaining a strong credit profile, shopping around for lenders and demonstrating financial stability, you can position yourself to secure a competitive interest rate on your HELOC. Just remember that every financial decision — including the one to take out a HELOC — should align with your long-term goals and be part of a larger financial plan.