Your Credit Score Alone Can Make or Break Your HELOC Rate

You’ve probably heard that maintaining an excellent credit score is very important when it comes to getting a mortgage.

Not only will it help ensure you qualify for a mortgage, a tip-top score will also make you eligible for the lowest mortgage rates available.

Yes, you’ll need to document income, assets, and employment as well, but your credit score can have the biggest impact on pricing.

The same is true for HELOC rates, which are tied to the prime rate (currently 6.25%) and a credit risk-based margin.

The margin you receive is heavily impacted by credit score. So if you plan to apply for a HELOC, better make sure your FICO scores are as high as can be.

How the Lender Determines Your HELOC Rate

I was looking at a rate sheet the other day for home equity lines of credit. Similar to rate sheets for closed-end first mortgages, there are pricing adjustments.

But because HELOCs are tied to the prime rate, which is essentially controlled by the Fed, individual banks provide varying margins to come up with your fully-indexed rate.

The margin is the risk-based piece of the equation that relates to your default risk.

In short, the prime rate plus your margin equals your HELOC rate. For example, if your margin were 1% and prime were 6.25%, your rate would be 7.25%.

If and when the Fed lowers or raises the fed funds rate, the prime rate will follow suit by the same amount.

Since early 2022, we have seen the prime rate rise from 3.25% to 6.25% as the Fed continues to fight historic inflation.

This means HELOC holders have seen their interest rates nearly double over the past year.

And they’re expected to keep rising to as high as 7.75% by early 2023. That would mean a rate of 8.75% for our hypothetical borrower with a 1% margin.

Your HELOC Margin Is All You Can Control

CLTV
FICO
<= 65 > 65-70 > 70-75 > 75-80 > 80-85
780+ 1% 1% 1% 1.5% 2.5%
760-779 1.25% 1.5% 1.5% 1.75% 3%
740-759 2% 2.25% 2.25% 2.5% 3.75%
720-739 2.25% 2.5% 2.5% 3% 4.25%
700-719 2.75% 3% 3.25% 3.25% 4.5%
680-699 4.5% 5% 5.5% 6% n/a

As noted, the Fed essentially determines the prime rate via its own borrowing rate because banks set it based on the target level of the federal funds rate.

Technically, banks could choose any prime rate, but they basically just follow the Fed.

This means there’s nothing we can do to change the prime rate, which is what banks tend to use…

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