Unlock your home’s equity with a HELOC

A home equity line of credit, commonly known as a HELOC, allows homeowners to borrow money against the equity they already have in their property. Similar to a credit card, it provides a specified credit limit that borrowers can draw from, repay, and access again during a set timeframe. The home serves as collateral for the line of credit, which typically results in a lower interest rate than an unsecured loan or credit card.

HELOCs operate in two distinct phases: a draw period and a repayment period. During the draw period, which often lasts 10 years, borrowers can withdraw funds up to their limit and are usually only required to make interest payments on the amount borrowed. Once this phase ends, the plan enters the repayment period, usually lasting 20 years, during which borrowers can no longer withdraw money and must pay back both the principal and the interest.

A HELOC is a credit line with variable interest rates, whereas a home equity loan is an installment loan with a fixed interest rate. While a HELOC offers flexibility to borrow only what is needed when it is needed, a home equity loan provides a lump sum of cash upfront that is repaid in equal monthly installments over a set term.

Lenders generally do not place restrictions on how HELOC funds are used, allowing homeowners to finance a wide variety of expenses. Common uses include funding major home improvements that may increase the property’s value, consolidating high-interest debt such as credit card balances, or covering significant costs like college tuition and medical bills. Financial experts often advise using these funds for purposes that improve a borrower’s financial position, rather than for discretionary consumer spending.

The borrowing limit is determined largely by the amount of equity available in the home and the lender’s maximum combined loan-to-value ratio, or CLTV. Most lenders allow homeowners to borrow up to 80% or 85% of the home’s appraised value, minus the balance of the existing mortgage. For example, if a home is valued at $300,000 and the homeowner owes $200,000, a lender with an 85% limit would allow a total debt of $255,000, leaving $55,000 available for the line of credit.

Borrowers typically need a credit score of at least 680 to qualify for a home equity line of credit from most major lenders, though requirements can vary. While some institutions may approve applicants with scores in the lower 600s, those with a score of 720 or higher generally secure the most favorable interest rates and terms. Lenders view your credit score as a key indicator of reliability, especially since the loan is a second lien on the property.

To qualify for a HELOC, homeowners generally must retain at least 15% to 20% equity in their property after accounting for the new credit line. This equity cushion protects the lender against fluctuations in the housing market and ensures the borrower is not overleveraged. If the total debt secured by the home exceeds 80% or 85% of its value, many lenders will deny the application due to the increased risk of default.

HELOCs traditionally come with variable interest rates that fluctuate based on an underlying financial benchmark, such as the prime rate. This means that a borrower's monthly payments can rise or fall over the life of the loan depending on broader economic conditions. However, some lenders offer a hybrid option that allows borrowers to convert a portion of their outstanding variable-rate balance to a fixed rate for a specified term to provide payment stability.