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Is the interest rate determined by when you take out the line of credit or when you draw from the credit line?

For variable rate HELOCs, the margin above/below your index is set at the time that you take out the line of credit. Then, interest rate on whatever balance you have is calculated based on that index +/- your margin, and will be calculated on a daily basis. Many HELOCs use the prime rate as the index, and the range around that index is often +/- 1%

So, as an example, if you have a loan that's 0.5% below the prime interest rate http://www.fedprimerate.com/wall_street_journal_prime_rate_h... that means from 3/15/20 - 3/15/22, with a prime rate of 3.25%, your interest would have been calculated at 2.75%; from 3/16/22 - 5/3/22, the prime rate was 3.5%, so your interest would have been calculated at 3.0%, and since 5/4/22, your interest would be calculated at 3.5% If your HELOC rate was the prime rate + 0.5%, then just add 0.5% to the prime rate to determine your interest rate, instead of subtracting it.

Since HELOCs that offer fixed rate options generally let the rate float until the customer asks for the rate to be fixed, they don't fix the rate until that time. However, they also generally only fix the rate for that part of the balance that the customer asks to be fixed - keeping the rate on the remaining line of credit as a floating rate. With HELOCs, you generally don't get a fixed rate unless you've actually drawn on that line of credit. And if you pay down some of that fixed amount, that part of the line goes back to being floating.

If you really want a fixed rate home equity product, you probably should look for a HELoan, with a fixed rate and a fixed term, and no ability to do additional draws. Since your intent is to use the proceeds for the downpayment, the inability to make additional draws shouldn't be an issue.

A word of caution when getting a HELoan: Be sure you understand how the payment term is amortized vs. the actual term of the loan. The HELoans that I've had in the past have calcluated the payment based on amortizing over a 30 year period, but the loan required a total payoff after only 15 years. So if you don't want to be forced to refinance the remaining balance at the rates prevailing 15 years after you took out the loan, you will either need to save up the projected balloon amount within the first 15 years in order to make that balloon payment, or make (higher) payments based on a 15 year amortization schedule, rather than required minimum payment that's based on a 30 year amortization schedule. Your lender's amortization schedule should show you the balloon payment that will be required, and you can use a payment calculator to figure how much extra you need to pay to pay the loan off in 15 years, rather than 30.

AJ

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