What is a Home Equity Line of Credit (HELOC)? - LendingTree (2024)

A home equity line of credit (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 payments are based only on the amount you’ve used, and you can pay off the balance and reuse it for several years. But unlike a credit card, you risk foreclosure if you can’t make your payments because home equity loans use your house as collateral.

A 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. A home equity line of credit is a type of second mortgage: 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.

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 much HELOC money can I get?

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.

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 marginis 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 ceilingsets 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.

Can I get a fixed-rate HELOC?

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.

A HELOC has two phases: a set time period for you to use your credit line and another when you repay the balance you owe.

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 $594 for an interest-only payment, or $674 for a principle-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%.

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.

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:

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?

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.

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.

Our picks for the best HELOC lenders

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.

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).

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.