What is a HELOC?
A home equity line of credit or HELOC (pronounced hee-lock) is a revolving line of credit using your home as collateral. The limit is based on the equity you have in your property. To qualify for a HELOC, lenders assess whether you have equity in your home (meaning, the amount you owe must be less than the value of your home), and other factors such as your credit score, credit history, and debt-to-income ratio. HELOC interest rates are often adjustable, with closing costs generally lower than conventional purchase home loans. Homeowners commonly use HELOCs to fund home improvements or other larger expenses.
How much HELOC can you get?
A HELOC requires home equity; generally, the more you've invested in your home by paying down the principal on your first mortgage, the greater the limit on your line of credit. You can typically borrow up to 85% of the value of your home, less the amount you owe on your first mortgage. HELOC limits depend on your home's value, the lender's criteria, the balance of your loan(s), your credit history and income.
Depending on your home's value, the balance of your loan(s), and your credit history, you may qualify for a HELOC to pay for your next big home project or fund another major expense.
A HELOC is just one option for homeowners to tap into their equity. Talk to a lender to find out if you qualify, and to see if this type of loan is right for you.
Calculate HELOC limit
How does a HELOC work?
Similar to a credit card, a HELOC has a line of credit limit available immediately to make small or large transactions, and you can increase the amount available to borrow from the account by paying back withdrawn amounts at any time.
Draw period
A HELOC has two predetermined periods, a withdrawal period or draw period, followed by a repayment period. You can withdraw funds for the full draw period, which is typically between 5-10 years while paying monthly interest on just the withdrawn amount. At the end of the draw period, you will no longer be able to draw against the line of credit even if you have not reached the maximum available credit limit.
Repayment period
Next, you enter the 'repayment period', usually between 10-20 years when you are required to begin paying back the full principal balance plus interest, either immediately often resulting in a balloon payment, or over the remaining loan term. Your monthly payment may increase substantially during the repayment period, depending on your principal amount due, interest rate, and your repayment period.
HELOC interest rates
Interest rates for HELOCs are typically variable, which means rates change over the life of the loan based on market trends. Variable HELOC rates are based on a variety of market conditions, making future monthly HELOC payments somewhat unpredictable.
If you prefer a fixed interest rate, some lenders offer HELOCs that allow a fixed rate advance. A fixed-rate HELOC advance option allows you to lock in all, or a portion of, your HELOC balance at a fixed-rate. The fixed-rate advance feature ends your ability to draw against the fixed-rate line of credit balance. Once you lock in a HELOC balance at a fixed-rate, you begin repayment on the balance for a period of typically 1-10 years. It is worthwhile to shop around for competitive HELOC rates to find a HELOC lender with the best rate and terms for your financial circumstances.
Frequently asked questions about HELOC
What is home equity?
Your home equity is simply the market value of your home, minus the amount you owe on the property from any loans or liens.
HELOC vs home equity loan, what is the difference?
A home equity loan, often called a second mortgage, is a lump sum borrowed against the equity you have in your home. A home equity loan is often a fixed-rate term loan with a predictable repayment schedule, in addition to your current mortgage. A HELOC is not a lump sum, but a revolving line of credit also borrowed against your available home equity. You only pay interest on the amount you use, and interest rates are most often adjustable.
What are HELOC closing costs?
HELOC closing costs are generally lower than home equity loan closing costs that range between 2% and 5% of the loan amount. The most expensive HELOC fee is typically the home appraisal. Other home equity lines of credit fees and costs include title insurance, recording fee, tax certification fee, flood certificate fee and document preparation costs.
No-closing-cost HELOCs can carry different loan restrictions and fees than HELOCs with closing costs. These HELOCs can limit your upfront closing costs, but may cost you more in interest while you keep your account open and may include prepayment penalties if you choose to pay off the outstanding balance and interest early to close the HELOC account. Before you open the account, read your HELOC documents carefully to understand possible fees or restrictions.
What can you use a HELOC for?
Most homeowners choose to use HELOCs for major financial expenses, such as a home remodel, rather than for day-to-day expenses. However, there is no restriction to the type of purchases you can make with HELOC funds. Learn more about reasons to use a HELOC.
How soon can you get a home equity line of credit after purchase?
The amount you can borrow for a HELOC will vary depending on your lender's criteria, but if you put 20% down when purchasing your home, you could be immediately eligible for a HELOC up to 5% of the value of the home, subject to any other lender-specific qualifications. In general, you need a minimum of 15% equity for a HELOC. The more equity you have, generally the greater the limit on your HELOC.
How do I get the best HELOC rate?
A good way to find the best HELOC rate is to shop around. HELOC interest rates are variable, based upon a published benchmark index rate, plus a margin that is independently established by each lender. Talk to several different lenders to compare the interest rate, costs associated with the loan and any third-party fees. Learn more about how to find the best HELOC rate.
Is a HELOC considered a second mortgage?
A home equity loan is often called a second mortgage because it is secured by your home and you receive funds in a lump sum. A HELOC is a different type of second mortgage because, like a home equity loan, it is secured by the equity in your home, but it operates differently than a more traditional home equity loan. Your HELOC acts more like a credit card, while still being secured by your home, and you use and repay as needed but you have a cap on the credit account.
Home equity line of credit requirements
HELOC qualification requirements vary by lender but a typical approval standard may include:
- Minimum of 15% home equity (based upon your home's value and any existing liens on the property)
- Debt-to-Income ratio of 40% or less
- A credit score of 620 or better; generally the higher the score, the more favorable the HELOC terms
- Proof of sufficient income and/or assets
How to get a home equity line of credit
The HELOC process typically follows these six steps:
1. Check your home equity. Do you have enough for your HELOC limit to cover the expense you’re trying to afford?
2. Connect with HELOC lenders and compare quotes.
3. Apply for a HELOC.
4. Underwriting. During underwriting you may be required to complete a home appraisal.
5. Review all documents, including the HELOC agreement and disclosures very carefully.
6. Sign and close. Receive access to your line of credit in as little as a few hours, depending on the lender.