Kiah Treece is a small business owner and personal finance expert with experience in loans, business and personal finance, insurance and real estate. Her focus is on demystifying debt to help individuals and business owners take control of their fina.
Kiah Treece Loans WriterKiah Treece is a small business owner and personal finance expert with experience in loans, business and personal finance, insurance and real estate. Her focus is on demystifying debt to help individuals and business owners take control of their fina.
Written By Kiah Treece Loans WriterKiah Treece is a small business owner and personal finance expert with experience in loans, business and personal finance, insurance and real estate. Her focus is on demystifying debt to help individuals and business owners take control of their fina.
Kiah Treece Loans WriterKiah Treece is a small business owner and personal finance expert with experience in loans, business and personal finance, insurance and real estate. Her focus is on demystifying debt to help individuals and business owners take control of their fina.
Loans Writer Deborah Kearns Mortgages ExpertWith two decades of experience as a respected journalist and communications leader in the mortgage field, Deborah Kearns is passionate about helping consumers make smart homeownership and personal finance decisions. Her work has appeared in The New Y.
Deborah Kearns Mortgages ExpertWith two decades of experience as a respected journalist and communications leader in the mortgage field, Deborah Kearns is passionate about helping consumers make smart homeownership and personal finance decisions. Her work has appeared in The New Y.
Deborah Kearns Mortgages ExpertWith two decades of experience as a respected journalist and communications leader in the mortgage field, Deborah Kearns is passionate about helping consumers make smart homeownership and personal finance decisions. Her work has appeared in The New Y.
Deborah Kearns Mortgages ExpertWith two decades of experience as a respected journalist and communications leader in the mortgage field, Deborah Kearns is passionate about helping consumers make smart homeownership and personal finance decisions. Her work has appeared in The New Y.
Updated: May 3, 2024, 3:02pm
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A home equity line of credit (HELOC) is a variable-rate second mortgage that utilizes a portion of your home’s value through a revolving line of credit. You can use, pay down and reuse the credit line during a set time period as needed.
The amount you can borrow with a HELOC depends on your home’s value and your equity—which is your home’s value minus the amount you owe on your first mortgage. Because your house serves as collateral to secure the loan, your lender can foreclose if you fail to repay.
FEATURED PARTNER OFFERMinimum credit score
620 with a 65% LTV
HELOC Loan Rates
Lower than the national average
Approval may be granted in five minutes but is ultimately subject to verification of income and employment, as well as verification that your property is in at least average condition with a property condition report. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing.
On New American Funding's Website620 with a 65% LTV
Lower than the national average
Approval may be granted in five minutes but is ultimately subject to verification of income and employment, as well as verification that your property is in at least average condition with a property condition report. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing.
A HELOC lets you access a portion of your home’s value through a line of credit. Much like a credit card, you draw on the credit line, pay it off and reuse it during a set timeframe called the draw period. This period lasts up to 10 years, and you pay interest only on the amount you withdraw.
After the draw period, the repayment period—which typically lasts 20 years—begins and you must pay off the outstanding principal and interest. If you sell your home before the loan term is up, you’ll need to pay off the HELOC in full.
You can use a HELOC to pay for just about any legal expense, such as home improvements, high-interest credit card debt, medical expenses, education costs or other large expenses spread out over time. However, it’s worth noting that you won’t be eligible to deduct the interest paid on the loan unless you use the proceeds to buy, build or substantially improve your home.
HELOC qualifications vary by lender, but standard requirements include:
While 620 is often the minimum credit score required to qualify for a HELOC—assuming you meet equity and income requirements—some lenders may have higher minimums. Keep in mind that the higher your credit score, the more competitive rates you’ll receive.
Most lenders allow you to access up to 85% of your home’s value with a HELOC. Home equity is one of the primary factors a lender evaluates when reviewing a HELOC application. To calculate your equity, find a quick estimate of your home’s value. Search your home address on real estate websites like Zillow.com or Realtor.com. These websites offer only rough estimates and your lender will likely require a formal appraisal when you apply for a HELOC.
Once you determine the market value of your home, add up the loan balance on your primary mortgage—and any other second mortgages—to find out how much you owe. Then, subtract the total mortgage balance from the home’s market value to get your equity amount.
Home’s Market Value – Total Mortgages = Amount of Equity in Home
Finally, divide your equity by the home’s appraised value to obtain your equity percentage. HELOC lenders typically look for equity between 15% and 20% of the home’s value before approval.
Equity in Home / Home’s Market Value = Equity Percentage in Home
For example, consider a home with a market value of $350,000 and $200,000 in outstanding mortgage balances. In this case, the homeowner has $150,000—or almost 43%—equity in the home and is likely to be approved for a HELOC. But if the same homeowner had $315,000 in outstanding mortgages on the same house, they would only have 10% equity in the home—less than many lenders require for a HELOC.
Before applying for a HELOC, shop around to compare HELOC rates and borrowing costs with multiple lenders to ensure you get the best deal for your needs. The current average interest rate for a HELOC is around 8%, according to Bankrate.
To get the best HELOC rates and terms, you’ll need a strong credit history and credit score, and at least 15% equity in your home. Shop around with several HELOC lenders to find the most favorable terms.
Because a HELOC is a line of credit and not a traditional loan, you can draw against it as needed rather than receiving the funds as a lump sum. During the draw period, which typically lasts up to 10 years, borrowers must still make monthly interest payments on the amount they borrow. They also have the option of paying down the principal during the draw period.
After the draw period, the repayment period begins and you won’t be able to draw on the credit line any longer. During this time, usually up to 20 years, borrowers are responsible for paying the principal and remaining interest in monthly installments.
You must pay a HELOC off if the home sells before the end of the loan term, and the lender may impose a cancellation fee. As such, a HELOC may not be the best option if you aren’t planning to stay in your home long-term.
The complete HELOC application process varies by lender and can take anywhere from a few hours to weeks. When applying for a HELOC, expect to follow these general steps:
Borrowers who are using their primary residence as collateral have up to three business days after closing on a HELOC to cancel the loan without penalty. This is known as the right of rescission.
The process for increasing the limit of a HELOC varies by lender. However, most lending institutions let borrowers request a line increase via phone or email. After the lender approves the increase, the outstanding HELOC balance is refinanced into a larger HELOC with revised terms and conditions, a new interest rate and updated draw and repayment periods.
Depending on your needs, a HELOC may not be the best fit for you. Consider these alternatives before signing on the dotted line:
A home equity loan is a second mortgage that allows you to borrow against your home’s value, meaning your home serves as collateral, by receiving a lump-sum payment. Most home equity loans come with a fixed interest rate, and you’ll typically pay the loan back in monthly installments over five to 30 years. Because of these differences, a home equity loan may be the best choice if you qualify for a low, fixed interest rate.
Cash-out refinancing involves getting a new, larger home loan that replaces your current mortgage. The loan rolls into your new mortgage, and you’ll receive the difference between your outstanding mortgage balance and the new loan amount as a lump sum.
Cash-out refinancing generally comes with lower interest rates and higher closing costs due to the larger loan amount. Choose a cash-out refinance if you want to borrow a large sum of money and can take advantage of lower interest rates.
Personal loans can help homeowners borrow money without pledging their homes as collateral. Interest rates are usually higher than for HELOCs, but borrowers can get a more competitive rate by securing a personal loan with assets like a car, real estate or stocks and bonds. Keep in mind, however, that interest on a personal loan is not tax deductible.
Personal loans may not be the best option if you have substantial equity in your home and can take advantage of a HELOC or home equity loan.
When you have a substantial amount of equity in your home that you want to use for significant expenses, you may be eligible for a cash-out refinance or a HELOC. The main difference between these two types of loans is that with a cash-out refinance, you replace your current loan with a new loan that features a larger balance. A HELOC, however, involves taking out an additional loan while retaining your existing mortgage.
Deciding between a cash-out refinance versus a HELOC comes down to your finances, current interest rates, how much equity you have and what your cash needs are.
Forbes Advisor Mortgages and Loans Writer Robin Rothstein contributed to this article.
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A HELOC may be an ideal option if you need access to cash for expenses spread out over a period of time. However, since HELOC rates fluctuate with the market, your payments could go up and be harder to manage.
If you have a HELOC and decide that you want to refinance your first mortgage, you may need approval from your HELOC lender. If your HELOC lender denies your refinance request but you still want to move ahead, you will likely need to first pay off your HELOC before you can refinance.
Using a HELOC to pay off your mortgage is a form of refinancing that can help to lower your monthly payments and the overall interest you will pay on your first mortgage. Borrowers may use a HELOC to pay off their mortgage if the HELOC interest rate is lower. Also, some lenders may offer HELOCs with low or no closing costs. If you qualify, a lender will approve you for a credit limit that covers what you owe on your mortgage. However, the ratio of the combined total of your mortgage loan and HELOC to the value of your property—or the combined loan-to-value (CLTV) ratio—usually can’t be above 80% of your property’s value. Once approved, you will have access to your funds, which you can use to pay down your primary mortgage.
HELOCs can impact your credit score if you don’t make on-time payments and because you’re increasing your amount of debt. However, if you make timely payments and borrow conservatively against the credit line, you might improve your credit score. A HELOC can improve your credit score and monthly cash flow by consolidating high-interest credit card debt. Additionally, paying off large credit account balances can help lower a high credit utilization rate or the amount of revolving credit you owe divided by your total available credit.
