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.
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 .
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.
→ 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.
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:
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.
Fixed-rate HELOCs are possible, but they’re less common. They let you convert part of your line of credit to a fixed rate. You will continue to use your credit as-needed just like with any HELOC or credit card, but locking in your fixed rate protects you from potentially expensive market changes for a set amount of time.
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.
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.
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 $770 for an interest-only payment, or $915 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.
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:
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.
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.
Don’t know your credit score? Get your free score and more on LendingTree Spring.
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.
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.
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.
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?
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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.
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.
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LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.
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