Last week, MarketWatch reported a slight drop in HELOC rates for 10-year repayment (5.49%), 20-year repayment (7.43%), and 30-year repayment (6.17%) of home equity lines of credit. If you're thinking of getting a HELOC or wondering if home equity debt consolidation is right for you, now is a good time to do your due diligence.

What is a home equity line of credit? 

Home equity lines of credit, or HELOCs, are a type of loans for home improvement that allows borrowers to tap into the equity they've built up in their homes. A HELOC can be a good option for borrowers who need to make a large home improvement purchase and who have good credit and strong income.

As a homeowner, you should be aware that a certain percentage of your mortgage payment each month adds to the equity that you own in the home. Mortgages work on an amortization schedule, meaning that a lower percentage goes towards equity in the early years of the arrangement and a higher percentage is applied towards the end. 

The equity belongs to you, but you can only turn it into cash by selling the house or borrowing against it. A home equity line of credit is money borrowed against the equity in your home. It's different from a traditional loan because you'll draw the money as needed, not in one lump sum. That makes HELOCs a great option for home improvement projects.   

How does a HELOC work? 

The amount you can borrow using a HELOC is based on how much equity you have in the home. Once the amount has been determined, the borrower can draw the money out over a predetermined number of years (typically 10 years). Repayment comes after the draw period is over and could be done over a 10-, 20- or 30-year period. 

Many homeowners take out a HELOC to do improvements that will increase the value of their home, thus increasing their equity. Good examples of this would be adding an additional bathroom or building an attached garage. Both projects would raise the property value, essentially paying the homeowner back the money they borrowed. 

Should you use a HELOC for Debt Consolidation? 

Improving the home is one way to use a HELOC. Another is to draw money to pay for higher-interest credit cards and loan debt. HELOC interest rates are significantly lower than most revolving or even fixed rate debt accounts, so this can be a money-saving move. The problem is that you need to put your house on the line to do it.

The equity in your home is a financial asset that you've already paid for. Credit card debt is an unsecured liability. It costs you money every month because the interest rates are high. That's a compelling argument to use a HELOC to pay it off, but do you want to risk the assets you've built up to do it? Getting an unsecured personal consolidation loan might be a better route. 

Getting the best rates on your HELOC

A home equity line of credit should not be an impulse decision. It's something that can be carefully planned for, so you have time to improve your chances of getting a better rate. Credit scores are a big deal. You'll want one over 760 if possible. You'll also want to get your debt-to-income ratio below 35%. That means paying off those pesky credit cards.

HELOC rates are low right now and it can't hurt to investigate what it would cost you to get one from your bank or mortgage lender. Just make sure you have a purpose for it. Home improvements are the best way to spend that money. Debt consolidation is an option, but maybe not a good one. Do your homework and you'll make the right decision.