What Is a HELOC? Home Equity Lines of Credit Explained
A home equity line of credit (HELOC) is a secured loan tied to your home 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. But unlike a credit card, you risk foreclosure if you can’t make your payments because HELOCs use your house as collateral.
What is a HELOC loan?
A HELOC is a way to borrow money that works a lot like a credit card — you can access money when you need it, up to a certain limit. Your monthly payments are based only on the amount you’ve used, and you can pay off the balance and reuse it for several years.
Home equity line of credits are a type of second mortgage, meaning you can get a HELOC even if you still have a first (or primary) mortgage on your house, and the HELOC will be second in line to be repaid in a foreclosure.
How much HELOC money can I borrow?
Your LTV ratio is a large factor in how much money you can borrow with a home equity line of credit. The LTV borrowing limit that your lender sets based on your home’s appraised value is 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. Remember that some lenders may set lower or higher home equity LTV ratio limits.
Use our HELOC calculator to estimate how much money you might qualify for.
Key takeaways about HELOCs
→ A HELOC is considered a second mortgage and uses your house as collateral if you fail to make the monthly payments.
→ HELOCs usually have lower rates than home equity loans but higher rates than cash-out refinances.
→ HELOC interest rates are variable and will likely change over the period of your repayment.
→ You should only get a HELOC if are looking for an affordable way to pay for expensive projects or financial needs and have a plan to pay it off.
→ You may be able to have lower, interest-only monthly payments while you are using the HELOC money.
HELOC interest rates: What to expect
Home equity lines of credit often have variable interest rates, which means your interest rate can change (or “adjust”) each month. Your lender will calculate your HELOC rate each month based on:
- The index. This is a base rate determined by the market. As such, it’s just the starting point for your lender as they calculate your HELOC rate. Each lender can set their own prime rate based on their assessment of where the market stands. However, many lenders use a standard index like the U.S. prime rate or the Constant Maturity Treasury (CMT).
- The margin is a set amount added to the index to calculate your interest rate. Financial factors specific to you — like your loan amount, credit score and DTI — help determine how much your lender adds. This gap between what the market determines and what you pay is how lenders make money on a HELOC.
- The ceiling sets a limit on how high your rate can rise at any time during the loan term. The ceiling can vary from lender to lender, but federal credit unions are not allowed to exceed 18%.
Lenders are required to tell you how they will calculate your HELOC rate adjustments, so if you have any questions don’t hesitate to reach out to your loan officer.
See current HELOC rates today.
Can I get a fixed-rate HELOC?
How a HELOC works
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. HELOC loans have two phases: a set time period for you to use your credit line and another when you repay the balance you owe.
- Phase one: The HELOC draw period. Once you’re approved for a home equity line of credit, the draw period starts. This first phase usually lasts for 10 years, and you can borrow as much cash as you want each month up to your credit limit. To make withdrawals, you’ll use checks or a card you can swipe. Depending on your lender, you may have the option to make interest-only payments during this phase.
- Phase two: The HELOC repayment period. Once the HELOC draw period ends, you can’t borrow from the credit line and you have to repay your outstanding balance — both principal and interest. HELOCs can require repayment all at once or through monthly payments. A typical repayment period is 20 years.
Falling home values will lower how much you can borrow
What is the monthly payment on a $100,000 HELOC?
Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $100,000 HELOC at today’s rates would be about $675 for an interest-only payment, or $843 for a principal-and-interest payment.
But, if you haven’t used the full amount of the line of credit, your payments could be lower. With a HELOC, much like with a credit card, you only have to make payments on the money you’ve used.
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. You should expect to meet the following HELOC loan requirements:
- 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.
- 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%.
- 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 to get your LTV ratio. Lenders normally allow a max LTV ratio of 85%.
HELOC minimum withdrawal requirements and fees
Can I get a HELOC with bad credit?
Don’t know your credit score? Get your free score and more on LendingTree Spring.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.
Benefits of a home equity line of credit
Reusable. You can use the credit line as needed.
Competitive interest rates. You’ll likely pay a lower interest rate than a home equity loan, personal loan or credit card, and your lender may offer a low introductory rate for the first six months. Plus, your rate will have a cap and can only go so high, no matter what happens in the broader market.
Less interest. You’re only charged interest on the amount you use, which isn’t how loans with a lump sum payout work.
Low payments. You can typically make low, interest-only payments for a set time period if your lender offers that option.
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.
Disadvantages of a home equity line of credit
Tough credit requirements. You may need a higher minimum credit score to qualify than you would for a standard loan.
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.
Second mortgage rates. HELOC rates are higher than cash-out refinance rates because they’re second mortgages.
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 HELOC closing costs ranging from 2% to 5% of the HELOC’s limit.
Unpredictable payments. Your payments can increase over time when you have a variable interest rate, so they could be much higher than you anticipated once you enter the repayment period.
Potential balloon payment. You may have a very large balloon payment due after the interest-only draw period ends.
Sudden repayment. You may have to pay the loan back in full if you sell your house.
Collateral. You could lose your home if you can’t keep up with your payments.
Is getting a HELOC a good idea?
A HELOC can be a good idea if you need a more affordable way to pay for expensive projects or financial needs. It may make sense to take out a HELOC if:
You’re planning smaller home improvement projects. You can draw on your credit line for home renovations over time, instead of paying for them all at once.
You need a cushion for medical expenses. A HELOC gives you an alternative to depleting your cash reserves for unexpectedly hefty medical bills.
You need help covering the costs associated with running a small business or side hustle. We know you have to spend money to make money, and a HELOC can help pay for expenses like inventory or gas money.
You’re involved in fix-and-flip real estate ventures. Buying and fixing up an investment property can drain cash quickly; a HELOC leaves you with more capital to buy other properties or invest elsewhere.
You need to bridge the gap in variable income. A line of credit gives you a financial cushion during sudden drops in commissions or self-employed income.
But a HELOC isn’t a good idea if you don’t have a solid financial plan to repay it. Even though a HELOC can give you access to capital when you need it, you still need to think about the nature of your project. Will it improve your home’s value or otherwise provide you with a return? If it doesn’t, will you still be able to make your home equity line of credit payments?
Think a HELOC is right for you? Get Personalized Rates TodayHow to use a home equity line of credit
The best ways to use a HELOC will usually generate some income for you, such as rental income from an investment property, profits from a business or increased home value. Sometimes, it could just save you money, like by reducing how much interest you’re paying on outstanding debts.
Common uses for HELOCs include:
→ Home improvements
→ Debt consolidation
→ Investing, including purchasing real estate
→ Education expenses
→ Medical bills
→ Wedding expenses
The worst ways to use a HELOC involve investing in depreciating assets like cars, boats or furniture. It’s also not a good idea 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.
Learn about the best ways to leverage your home equity.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 need to provide information about yourself (and 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, like when paying for home improvement projects or medical bills. If you’re unsure what option is best for you, compare different loan alternatives, 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
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 to apply with just one as long as you do the applications within a 45-day window.
Learn more about our picks for the top HELOC lenders below.
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 a home equity line of credit is the right move, sign on the dotted line! Make sure you can cover the closing costs, which can range from 2% to 5% of the HELOC’s credit line amount.
Ready to compare top HELOC lenders?Our picks for the best HELOC lenders
| Lender | LendingTree rating | Available loan terms |
|---|---|---|
| 10-year draw period 20-year repayment period |
||
| 2- to 5-year draw period 5- to 30-year repayment periods |
||
| Not disclosed | ||
| 20-year draw period 20-year repayment period |
||
| Variable-rate HELOCs: 10-year draw period with a 20-year repayment period Fixed-rate HELOCs: 5- to 30-year repayment periods |
To determine the best HELOC lenders, we reviewed data collected from 35 lender reviews completed by the LendingTree editorial staff.
Each lender review gives a rating between zero and five stars, based on several HELOC features including home equity product features and variety, digital application processes and the availability of product and lending information online. To be eligible for a “best of” HELOC title, lenders must have a lender review rating of at least four stars.
We awarded extra points to lenders who:
- Publish HELOC rates online
- Provide detailed information about one or several different HELOC loan options
- Offer a loan-to-value (LTV) ratio above the 85% industry standard
- Offer fast closing options
- Offer products with rate discounts or no closing costs
Our editorial team brought together the data from our lender reviews, as well as the scores awarded for HELOC-specific characteristics, to find the lenders with a product mix, information base and guidelines that best serve the needs of HELOC borrowers.
How do I find the best HELOC rates and lenders?
- Get at least three to five quotes from HELOC lenders to compare costs — get started today with our list of top HELOC lenders above.
- Improve your credit score.
- Reduce the amount of home equity you borrow.
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 home equity line of credit 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.
See current refinance rates today.
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, but the interest rates are higher than HELOCs.
Is a HELOC better than a personal loan?
If you want to pay as little interest as possible, a HELOC may be your best bet. However, if you don’t feel comfortable tying new debt to your home, a personal loan may be better for you. HELOCs are secured by your home equity, so if you can’t keep up with your payments, your creditor can use foreclosure to take your home.
Personal loans don’t require you to tie the debt to your home or any other possession — if you can’t keep up with the payments, your creditor can’t seize any of your personal property without going to court first, and even then there’s no guarantee they’ll be able to take your property.
See current personal loan rates 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.
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.
When you apply for a HELOC, your lender will do a hard credit pull that can temporarily cause your score to drop by a few points.
Once you’re approved, you can use as much of the credit line as you’d like without it affecting your credit utilization rate. This is unexpected for many borrowers because it’s different from how credit cards work. But credit cards are unsecured, whereas HELOCs are secured by your home equity.
As with any loan, if you make regular, on-time payments a HELOC will help build your credit score. But, if you miss payments, your credit will suffer.
If you’re having trouble keeping up with loan payments, reach out to your lender. Lenders are often willing to work with customers who ask for help, and may modify some of the terms of your loan to make your payments more affordable. Even a relatively small change to your interest rate or loan term can reduce your payments enough to get you back on track.