What Is a HELOC? Home Equity Lines of Credit Explained
A home equity line of credit (HELOC) is a way to borrow money that works a lot like a credit card — you can access funds anytime you need to, up to a certain limit. Your payments are based only on the amount you’ve used, and you can pay off the balance and reuse it for several years.
However, unlike a credit card, a HELOC is a secured loan tied to your home — so you’ll risk going through foreclosure if you can’t make your payments. Understanding how a HELOC works, and when it makes the most sense to use one, can help you decide whether it’s the best option for you.
What is a HELOC loan?
A HELOC is a type of second mortgage that allows you to access cash as you need it. You’ll be able to make as many purchases as you’d like, as long as they don’t exceed your credit limit. You can get a HELOC even if you still have a first (or primary) mortgage on your house; the HELOC will simply be second in line to be repaid in the event of a foreclosure.
Because a HELOC is a credit line, it functions differently from a “regular” installment loan like your first mortgage, a home equity loan or personal loan.
How a HELOC works
A HELOC has two different phases: a set time period for you to use your credit line and another during which you repay the balance you owe.
Phase one: The HELOC draw period
Once you’re approved for a HELOC, the draw period starts. In this first phase (typically 10 years), you can borrow as much cash as you want each month up to your credit limit. To make withdrawals, you’ll have checks or a card you can swipe. Plus, depending on your lender, you may have the option to make interest-only payments during this phase.
HELOC minimum withdrawal requirements and fees
Many HELOC lenders require a minimum withdrawal — the amount will depend on your lender and credit limit. HELOC loan programs also often have fees, including one-time fees for closing costs and ongoing maintenance and membership charges.
The minimum payment required can change depending on how much you’ve borrowed and the current interest rate.
Phase two: The HELOC repayment period
Once the HELOC draw period ends, you can no longer borrow from the credit line and you’re required to repay your outstanding balance — both principal and interest. HELOCs can require repayment all at once or through monthly installments. A typical repayment period is 20 years.
How do I find the best HELOC rates and lenders?
It’s crucial to shop for the lowest HELOC rates, which can save you thousands over the life of your HELOC. Get at least three to five quotes from HELOC lenders to compare costs.
Other steps you can take: Beef up your credit score and reduce the home equity amount you borrow. Both higher credit scores and lower loan-to-value (LTV) ratios are correlated with lower HELOC rates.
Ready to compare top HELOC lenders?How to get a home equity line of credit
Getting a HELOC is similar to getting a mortgage or any other loan secured by your home. You’ll need to provide information about yourself (as well as any co-borrowers) and your home.
Step 1. Make sure a HELOC is the right move for you
HELOCs are best when you need large amounts of cash on an ongoing basis: For example, covering home improvement projects or paying off medical bills. If you’re unsure what option is best for you, compare different loan types, such as a cash-out refinance or home equity loan.
But whatever you choose, be sure you have a plan to repay the HELOC.
Step 2. Gather documents
You’ll need to provide lenders with documentation about your home, your finances — including your income and employment status — and any other debt you’re carrying.
Step 3. Apply to HELOC lenders
Apply with a few lenders and compare what they offer regarding rates, fees, maximum loan amounts and repayment periods. It doesn’t hurt your credit to apply with multiple HELOC lenders any more than it does to apply with just one, as long as you do the applications within a 45-day window.
Learn more about our picks for the best HELOC lenders to find the right lender for you.
Step 4. Compare offers
Take a critical look at the offers on your plate. Consider total costs, the length of the phases and any minimums and maximums.
Step 5. Close on your HELOC
If everything looks good and it’s the right move, sign on the dotted line! Make sure you’re prepared to cover closing costs, which can range from 2% to 5% of the HELOC’s credit line amount.
How much HELOC money can I get?
Your LTV ratio is a large factor in determining how much money you can access with a HELOC. An LTV is a borrowing limit that your lender sets based on your home’s appraised value, and it’s normally capped at 85%. For example, if your home is worth $300,000, then the combined total of your current mortgage and the new HELOC amount can’t exceed $255,000. Keep in mind that some lenders may set higher or lower LTV ratio limits.
You can use LendingTree’s HELOC calculator below to quickly estimate how much you could access with a HELOC.
Follow these steps to get an idea of how much you may qualify to borrow with a home equity line of credit:
- Estimate your home’s value. Try an online home value estimator or ask your real estate agent.
- Multiply your home’s value by 85%*. You’ll need to convert the percentage to a decimal; in this case you’ll multiply your value by 0.85.
- Subtract your mortgage balance from Step 2. The result is how much HELOC money you may qualify to borrow.
*85% is the standard maximum LTV for a HELOC. However, if you know a specific lender’s maximum LTV is different, you can plug it in here to get a more accurate picture.
Let’s say your home is worth $400,000, your current loan balance is $250,000 and your lender sets their HELOC LTV limit at 85%.
| Enter your home’s value: | $400,000 |
| Multiply the value by 0.85: | x 0.85 = $340,000 |
| Subtract your loan balance: | ($250,000) |
| Estimated HELOC money you may qualify for | = $90,000 |
What is the monthly payment on a $50,000 HELOC?
Here are some ballpark monthly payment examples at current HELOC rates:
- During the draw period, interest-only payments on a maxed-out $50,000 HELOC might be around $225.
- During the repayment period, initial payments on a $50,000 HELOC could be around $642.
However, keep in mind that HELOCs usually come with variable rates, so the amount of interest you pay will typically change on a monthly basis.
And, unlike with personal loans or home equity loans, HELOC payments are based only on how much you’ve spent, not your total credit limit. So if you have a HELOC with a $50,000 limit, how much your monthly payments will be depends on whether you spend up to your limit in one big purchase, or slowly over the course of your draw period.
How to use a HELOC
Common uses for HELOCs include:
→ Home improvements
→ Debt consolidation
→ Investing, including purchasing real estate
→ Education expenses
→ Medical bills
→ Wedding expenses
However, just because a HELOC can give you access to capital when you need it doesn’t mean it’s always the best idea. You need to think about the nature of your project. Will it improve your home’s value or otherwise provide you with a return? What if it doesn’t — will you still be able to make your HELOC payments?
The best ways to leverage your home equity typically generate some type of income for you, whether that looks like rental income from an investment property, profits from a business or increased home value. In some cases, it may simply save you money — for instance, by allowing you to reduce how much interest you’re paying on outstanding debts.
The worst ways to use your home equity involve investing in depreciating assets like cars, boats or furniture. It’s also unwise to borrow against home equity to cover everyday expenses. If you’re having trouble affording daily life, you should seek a more permanent solution, like mortgage forbearance or a loan modification.
HELOC requirements
To qualify for a HELOC, you’ll need to provide financial documents, like W-2s and bank statements — these allow the lender to verify your income, assets, employment and credit scores.
Expect to meet the HELOC loan requirements below.
Minimum 620 credit score
You’ll need a minimum 620 score, though the most competitive rates typically go to borrowers with 780 scores or higher.
Don’t know your credit score? Get your free credit score on LendingTree today.
Can I get a HELOC with bad credit?
It’s not easy to find a lender who’ll offer you a HELOC when you have a credit score below 680. If your credit isn’t up to snuff, it may be wise to put the idea of taking out a new loan on hold and focus on repairing your credit first.
Debt-to-income (DTI) ratio under 43%
Your DTI is your total debt (including your housing payments) divided by your gross monthly income. Typically, your DTI ratio shouldn’t exceed 43% for a HELOC, but some lenders may stretch the limit to 50%.
Learn more about how to calculate your DTI ratio.
Loan-to-value (LTV) ratio under 85%
Your lender will order a home appraisal and compare your home’s value to how much you want to borrow using your LTV ratio. A HELOC borrower’s LTV ratio is normally capped at 85%.
Watch out for falling home values
Borrowers should watch out for freezes or reductions in their available HELOC funds if home values drop significantly during the HELOC’s term, according to the Consumer Financial Protection Bureau (CFPB). Lenders may do ongoing home value checks and adjust how much you can borrow.
Ready to start comparing HELOC rates from top lenders?HELOC pros and cons
HELOCs have some major advantages over more expensive unsecured loans, like credit cards and personal loans. However, there are some pitfalls that can get you into trouble — much like a credit card, an open credit line can make it easy to spend beyond your means.
| Pros | Cons |
|---|---|
Reusable. You can use the credit line as needed. Competitive rates. You'll likely pay a lower interest rate than personal loan or credit card APRs. Low payments. You can typically make low, interest-only payments for a set time period. Tax benefits. You may be able to write off your interest at tax time if your HELOC funds are used for home improvements. No mortgage insurance. You can avoid private mortgage insurance (PMI), even if you finance more than 80% of your home's value. | Fees. You may have monthly maintenance and membership fees, and could be charged a prepayment penalty if you try to close out the loan early. Changing interest rates. Your HELOC rate is usually variable, which means your payments will change over time. Closing costs. You'll usually have to pay closing costs ranging from 2% to 5% of the HELOC's limit. Rising payments. Your payments could become unaffordable once you enter the repayment period. Collateral. You could lose your home to foreclosure if you default on your HELOC. |
Alternatives to a HELOC: Which is better?
HELOC vs. Home equity loan
A home equity loan is another second mortgage option that allows you to tap your home equity. Instead of a credit line, though, you’ll receive an upfront lump sum and make fixed payments in equal installments for the life of the loan. Since you can usually borrow roughly the same amount of money with both loan types, deciding on a home equity loan versus HELOC may depend largely on whether you want a fixed or variable interest rate and how often you want to access funds.
Is a HELOC better than a home equity loan?
The answer to this question will depend on your needs. A home equity loan is good when you need a large sum of cash upfront and you like fixed monthly payments, while a HELOC may work better if you have ongoing expenses.
See current home equity loan rates today.
HELOC vs. Cash-out refinance
A cash-out refinance replaces your current mortgage with a larger loan, allowing you to “cash out” the difference between the two amounts. The maximum LTV ratio for most cash-out refinance programs is 80% — however, the VA cash-out refinance program is an exception, allowing military borrowers to tap up to 90% of their home’s value with a loan backed by the U.S. Department of Veterans Affairs (VA).
Is a HELOC better than a cash-out refinance?
A cash-out refinance may be better if changing the terms of your current home loan will benefit you financially. However, since interest rates are currently high, right now it’s unlikely that you’ll get a rate lower than the one attached to your original mortgage.
A HELOC may make more sense for you if you want to leave your original mortgage untouched, but in exchange you’ll usually have to pay a higher interest rate and likely also have to accept a variable rate. For a more in-depth comparison of your options for tapping home equity, check out our article comparing a cash-out refinance versus HELOC versus home equity loan.
HELOC vs. Personal loan
A personal loan isn’t secured by any collateral and is available through private lenders. Personal loan repayment terms are usually shorter, though the interest rates are higher than HELOCs.
Is a HELOC a good idea?
A HELOC can be a good idea if you have ongoing expenses and a set plan to pay off the loan. It can be a great funding source for home improvement projects, debt consolidation, education expenses or medical bills.
But a HELOC isn’t a good idea if you don’t have a solid financial plan to repay it — you could lose your home, after all.
Start comparing current HELOC rates and top lenders today.Frequently asked questions
You can only deduct HELOC interest when you’re using the funds to buy, build or substantially improve the home that secures the loan. However, the amount you can deduct is capped, based on how you file taxes.
No. HELOC rates are typically variable, but you can convert a variable-rate HELOC into a fixed-rate loan by refinancing your principal balance. You can do that with the same lender or a new one.
It can take two to six weeks from your first application submission to when you receive your HELOC card or checks in the mail.
You can cancel a HELOC for any reason within three business days after your closing (this three-day time period includes Saturdays, but not Sundays), though you’ll have to do it in writing. The lender must refund any fees you’ve already paid. However, if you can prove that the lender didn’t provide all of the required material about the HELOC, you could get up to three years to cancel the credit line.
If neither of these solutions apply, your best bet may be to refinance your HELOC by getting another loan. You could pay it off with your savings, another loan or even another HELOC. Look at your contract first to ensure you won’t face any prepayment penalties.