If you’re a homeowner, you’ve probably heard about tapping into your home’s equity to help fund big expenses or consolidate debt. A home equity line of credit (HELOC) can be a flexible and cost-effective option. And with recent interest rate reductions, now might be the perfect time to explore the flexibility of this loan. Choosing a HELOC, however, isn’t a decision to take lightly. It’s like planning a major purchase—you need to know what to look for, what fits your needs, and what potential pitfalls to avoid. To help you navigate this process, we’ve broken down nine key factors to keep in mind as you evaluate your options. Let’s dive in!
1. Understand the Interest Rate
Although you may be able to find a fixed rate, the interest rate on most HELOCs is adjustable, meaning it can change over time. Rates are determined by two main components:
- Index: A benchmark interest rate, such as the prime rate.
- Margin: An additional percentage that the lender may add to (or subtract from) the index.
For example, at Middlesex Savings Bank, the index that we use is the prime interest rate, and our margin is negative .5%, so the rate is expressed as prime minus .5%. As of January 1, 2025, the prime rate was 7.50%, and the interest rate on our HELOC is 7.00%. Understanding how your rate is calculated can help you plan for future payments.
2. Term and Structure of the Loan
HELOCs have two distinct periods:
- Draw period: Typically 5–10 years when you can borrow as needed.
- Repayment period: When the repayment period starts, you can no longer access the line and must repay the outstanding balance over the remaining term. Draw periods generally range from 5 to 10 years. Repayment periods are commonly 10 years, but can be longer, allowing you more time to repay the balance. At Middlesex, our HELOCs offer a 10 year draw period and a 20 year repayment period, for a total term of 30 years. This structure can provide both flexibility and predictability.
3. Determine the Available Line Amounts
Your borrowing limit depends on your home equity and your lender’s policies. Most lenders allow borrowing up to 80% of your home’s value, minus your mortgage balance. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage:
- 80% of $300,000 = $240,000
- Subtract your mortgage balance: $240,000 – $200,000 = $40,000
At Middlesex, you can borrow between $20,000 and $500,000, depending on your equity and other factors.
4. Know the Minimum Payments
More often than not, interest is charged monthly based on the outstanding balance. Some lenders will also require that a portion of the principal balance be repaid as part of the minimum required payment. At Middlesex, only the interest payment on the outstanding balance is due each month. Paying down the principal is optional during this time, giving you flexibility to manage your budget.
5. Cost to Obtain the HELOC
Opening a HELOC may involve paying an application fee, points and/or other closing costs. Common fees include the cost of an appraisal or an additional fee if the home is held in a trust. We keep it simple—there are no application fees, points, or closing costs (including appraisal or trust-related fees). That means more of your money stays in your pocket.
6. Cost to Maintain the HELOC
Some HELOCs require an annual fee, whether you use the line or not. Some lenders may only charge a fee if you do not use the line for some specified period of time. The annual fee at Middlesex is $50. It is waived however, if you maintain a Freedom Gold® or Freedom Platinum Checking® account.
7. Cost to Close Out the HELOC
Most HELOCs today have an early termination fee that is charged if you close out your HELOC shortly after opening it, generally within the first three years. The fee would apply if, for example, you sell your home or refinance and close out the line in the process. It does not normally apply if you just pay your balance off without closing the line, although other fees may apply such as a non-usage fee or if the line had a minimum required draw. The early termination fee is charged to help the lender recoup some of the costs of opening the line, such as the title search, recording fees, etc. In some cases, the fee can be quite substantial, amounting to thousands of dollars. Middlesex charges $400 if the line is closed (not just paid down to a zero balance) within the first 24 months.
8. Check Relationship Requirements
With some lenders, in order to get the best possible deal, you may be required to open and maintain a new deposit account with them. They may also have additional conditions, such as setting automatic payments from it. Middlesex has no such requirements. We believe simplicity and transparency are key.
9. Be Aware of Minimum Draw Requirements
Some lenders may require you to withdraw a minimum amount at closing, even if you don’t need the funds right away. This could result in unnecessary interest payments or fees if you repay the draw too quickly. At Middlesex, there’s no minimum draw requirement—so you have the freedom to access funds only when you need them.
Ready to Take the Next Step?
A HELOC can be a valuable financial tool, but it’s important to choose one that aligns with your needs and goals. By considering these nine factors, you’ll be well-equipped to make an informed decision. At Middlesex Savings Bank, we’re here to help you every step of the way. If you have any questions or are ready to explore your options, don’t hesitate to reach out to our team.
With a HELOC from Middlesex Savings Bank, you’ll enjoy:
- No application fee
- No closing costs
- Flexible access to funds
- Convenient repayment options
If you have any questions, our home loan specialists are ready to help. Please contact us at 1-877-672-7654, email [email protected], or schedule an appointment.
All loans are subject to credit approval. Property insurance required. Owner occupancy required. See a tax advisor regarding deductibility of interest on loans. Others terms and conditions apply. Rates subject to change at any time and are quoted assuming an 80% loan-to-value.