What Is a Floor Rate on a Home Equity Loan or HELOC?

A challenge with variable interest rates is knowing what to expect. But one thing you can count on is the floor rate. This is the ultimate bottom line, the minimum interest rate you’ll ever pay. 

Don’t get caught off guard. Read on to find out about the floor rate and how it can affect your home equity loan or line of credit (HELOC).

In this guide:

• The basics of an interest rate floor
• How do floor rates affect home equity loans?
• About floor rates in HELOCs
• Current landscape of floor rates
• FAQ

The basics of an interest rate floor

A floor rate is the minimum interest rate a lender will charge on a home equity loan or HELOC. It’s often set in the loan agreement and can’t be lowered, even if market interest rates drop. 

For example, if your home equity loan has a floor rate of 4%, and the market rate drops to 2%, your rate would never fall below the 4% floor.

Floor rates can protect lenders from losing money in a volatile market, but they can also limit your ability to take advantage of lower interest rates. Before you take out a loan, ask the lender about floor rates and what home equity or HELOC requirements you need to meet.  

How do floor rates affect home equity loans?

Most home equity loans have fixed interest rates. This means the rate you start with is the one you keep from start to finish. So if you have a fixed-rate home equity loan, floor rates won’t matter.

But if you have a variable-rate home equity loan, where the rate can change frequently based on market conditions, you may have a floor rate. This will be the lowest interest rate you’ll ever pay on a loan, no matter how much market rates decrease. 

Some lenders might let you negotiate your floor rate, along with other loan terms, but many have set standards. 

Example

Let’s say you take out a $50,000 home equity loan with a fixed interest rate of 5%. In this case, you won’t have a floor rate because your rate will always be 5%. 

But now let’s say you happen to have a $50,000 home equity loan with a variable rate. The rate is determined by a benchmark that’s at 5% plus a 1% margin when you take out the loan, so your starting interest rate is 6%. 

Over time, if the benchmark drops to 2%, your interest rate should be 3% (benchmark + margin). But if your loan has a 4.5% floor rate, your rate won’t drop to 3%; it will stay at 4.5%. Your rate will be higher than if the lender had no floor rate.

Scenario	Benchmark rate	Margin	Floor rate	Final interest rate
Fixed-rate loan	N/A	N/A	N/A	5%
Variable-rate loan	5%	1%	N/A	6%
Variable with low benchmark	2%	1%	N/A	3%
Variable with floor rate	2%	1%	4.5%	4.5%

• Fixed-rate loan: No surprises. With a fixed interest rate of 5%, there’s no floor rate. You always know what you’re getting—in this case, a 5% interest rate.
• Variable-rate loan: Starting point. You begin with a 6% interest rate due to the 5% benchmark and 1% margin. It can go up or down depending on the benchmark.
• Variable loan with a low benchmark: Potential savings. If the benchmark drops to 2%, your rate goes down to 3%. That’s terrific news for you.
• Variable loan with a floor rate: The catch. Here’s the tricky part. Even if the benchmark plummets to 2%, a 4.5% floor rate means you won’t pay less than 4.5% in interest. That could cost you thousands more over a 10-year period.

About floor rates in HELOCs

A home equity line of credit lets you borrow money using the equity in your home as collateral. It’s like a credit card but for your house. Most HELOCs have variable interest rates that can change based on market conditions.

Floor rates often apply to variable rates and set a “bottom limit” for what you’ll pay on your HELOC. They don’t apply to fixed-rate loans. So if you lock in part or all of your HELOC balance so it has a fixed rate, you won’t need to worry about a floor rate.

When you first open a HELOC,  lenders might offer a low introductory rate as a promotional tactic to attract borrowers. This rate is often temporary, lasting the first six months or the first year.

Sometimes, the introductory rate can be lower than the floor rate. So before you let a company reel you in with its low promotional rate, look at what the floor rate is. Because once the promotional period ends, your rate won’t drop below that floor rate, even if market conditions suggest it should. 

Example

Let’s say you decide to get a HELOC to make home improvements. The bank offers you an enticing introductory rate of 0% for six months. You’re happy to take the fantastic deal. But you also notice the HELOC has a floor rate of 4%.

After six months, market conditions change, and the variable interest rate tied to your HELOC comes out to 2.5% (based on the prime rate + your lender’s margin). You might expect your interest rate to adjust to 2.5%, but because of the floor rate, your interest rate will not drop below 4%.

This example highlights the importance of understanding floor rates. Even if market rates go below the floor, you’re still bound to that minimum. 

You might benefit from the introductory rate, but consider the implications of the floor rate for the rest of your loan term. 

Current landscape of floor rates

Floor rates change over time but often not as frequently as the variable rates they’re associated with. A lender’s floor rate is typically a long-term decision. But the institution reserves the right to change it based on its policies and market conditions.

Lenders set floor rates with the health of the housing market, inflation rates, and central bank policies in mind. If the economy is expected to face turbulent times—similar to when the Federal Reserve slashed rates to near 0% in 2020—lenders might adjust their floor rate to protect their interests.

Based on our experience, not many lenders advertise floor rates online. They’re much more likely to advertise the ceiling rate, which is the maximum amount of interest you could pay for your loan. 

Out of 12 HELOC lenders, we found advertised floor rates for four: 

Home equity lender	Floor rate
Bethpage Federal Credit Union HELOC	3.25%
Navy Federal Credit Union HELOC	3.99%
Spring EQ HELOC	4.00%
U.S. Bank HELOC	3.25%

Rand Millwood, CFP®, recommends comparing other loan features alongside floor rates when choosing a home equity loan or HELOC: 

1. You want to know the minimum equity requirements because you might want to take out a larger HELOC than you need at the moment for future projects. 
2. Consider the adjustment rate for any variable-rate loans (because some have limits on the amount of increase in a given time). 
3. Be aware of the repayment terms. Many home equity loans and HELOCs have shorter repayment periods than your typical mortgage.

If you’re considering a HELOC or home equity loan from a company that doesn’t publish its floor rates online, he advises: “You’d want to ask about the floor rate of the loan as part of the underwriting process and ask about any flexibility to ensure you can get it as low as possible. Lenders are required to provide you with this information, and it will be included in your loan documents.”

FAQ

What’s the opposite of a floor rate?

The opposite of a floor rate is a “ceiling rate” or “cap rate.” It’s the maximum interest rate you could be charged on a variable loan. A floor rate sets the lowest your interest can go, and a ceiling rate sets the highest it can reach. 

This protects you during times of high interest rates by ensuring your rate won’t skyrocket beyond a certain level. The ceiling rate for many variable rate home equity loans is 18%, but it can be as high as 24% or more. 

Does everyone get the same floor rate, or does credit score play a part?

Everyone gets the same floor rate. The lender sets it based on market conditions. The floor rate might be consistent, but the interest rate you qualify for will vary based on factors including your credit score and the amount of equity you have in your home.

How can you tell whether the floor rate on your home equity loan or HELOC is competitive?

To determine whether the floor rate on your home equity loan or HELOC is competitive, start by comparing it to the minimum floor limits offered by other lenders: Bethpage Federal Credit Union, Navy Federal Credit Union, Spring EQ, and U.S. Bank all publish minimums online. If your floor rate is lower or in line with these industry rates, it’s likely competitive.

How does the prime rate factor in?

The Wall Street Journal Prime Rate is often the benchmark for setting interest rates on HELOCs and other variable-rate loans. The rate is often the prime rate plus a margin. So if the prime rate is 5% and the margin is 1%, your annual percentage rate (APR) would be 6%.

Even if the prime rate plummets, the floor rate will prevent your interest rate from going below a certain level. And if the prime rate rises, it might be capped by a ceiling rate.

Can a floor rate change over time, or is it static?

Once your home equity loan or HELOC is active, the floor rate usually can’t change. It serves as a consistent minimum interest rate you can expect, regardless of market fluctuations. Always review your loan agreement to be certain of its terms, including whether it has a floor rate.