How a home equity line of credit works
A HELOC allows you to borrow as needed, up to a certain credit limit based on your home’s value (minus any existing mortgages). Most HELOCs have variable interest rates, which rise and fall with the market.
As you pay down the HELOC balance, you’re able to continue borrowing more. This flexibility can be convenient if you’re financing a series of expenses.
HELOCs have two phases:
Draw period. The timeframe when you can borrow from the HELOC usually lasts 10 years. During this phase, you typically only have to pay interest on the amount you’ve borrowed.
Repayment period. After the draw period ends, you can’t borrow any more and you begin paying the principal and interest. You’ll usually have up to 20 years to pay off the remaining balance.
Requirements for a home equity line of credit
In order to qualify for a HELOC, you’ll need to meet lenders’ minimum requirements. These can vary across lenders, but following these guidelines will help you qualify with the widest range of lenders.
Enough home equity. Most lenders will allow you to borrow up to 80-85% of the value of your home, minus any other mortgage debt.
A solid credit score. Most lenders will want to see a score of at least 620, and some have higher minimums.
Minimal debt. Lenders will look at the percentage of your income that goes towards monthly debt obligations (called your debt-to-income ratio, or DTI). A DTI of 43% or less will help you qualify with the most lenders.
MORE NERDY PERSPECTIVE 🤓
 | What is a HELOC for? I had a neighbor who used a HELOC to buy a Harley. That was a mistake, for two reasons. First, a Ducati would have been way cooler. Second, it's not advisable to spend your home equity on things that lose value (like motorcycles) or for experiences like vacations. (He lost the house and bike in the Great Recession.) Instead, use a HELOC to invest in home improvements or tuition — things that improve the financial standing of you or your family. - Holden Lewis, Senior Writer/Spokesperson, Mortgages |
Getting the best HELOC rate
To obtain the best HELOC rates, make sure you shop around with at least three lenders. This will help you find the combination of features and interest rates that make the best HELOC for your needs.
The best rates are also typically reserved for borrowers with strong credit scores (740 and higher). While a DTI of 43% is the maximum to qualify for a HELOC with many lenders, a ratio of 36% or less will help you get the best rate offers.
Benefits and disadvantages of HELOCs
Benefits
Flexibility. You can borrow what you need as you need it, up to your credit limit.
Low initial payments. During the draw period, the minimum monthly payment usually covers just the interest on the balance, and you aren’t required to pay the principal.
Disadvantages
Payments can be unpredictable. Most HELOCs have a variable interest rate. When the interest rate rises, the minimum monthly payment will increase, too.
Risk of foreclosure. If you can’t keep up with your monthly payments — especially if you made the minimum interest payment during the draw period and aren’t prepared to pay the principal — you could lose your home.
A HELOC is not your only option for tapping your home's equity.
Product | How it works | Who it's for | Best lenders |
|---|---|---|---|
You open a line of credit backed by a percentage of your home equity. You’ll usually pay it back at a variable rate. | Borrowers who want flexibility to draw from their home equity as they need it. | See top of this page. | |
You borrow a percentage of your home equity as a lump sum loan and pay it back at a fixed rate. | Borrowers who know how much they need to borrow, and would benefit from taking it out all at once. Home equity loans can also make sense for borrowers who prefer predictable payments. | ||
You replace your current mortgage with a new, larger loan, with a new interest rate and repayment terms. You pocket the difference between your new mortgage and the original loan. | Borrowers who want to refinance their current mortgage and take cash out. Cash-out refinances also make sense for borrowers who prefer to manage one loan. | ||
You sell off a stake in your future equity earnings in exchange for an advance on some of your current equity. Most consumers are better served by a HELOC if they qualify. | Borrowers who cannot qualify for a HELOC but need cash flow. Shared appreciation agreements are typically for homeowners with a lot of equity but not enough savings. | N/A. |
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Frequently asked questions
- What credit score do you need for a HELOC?
Lender requirements vary, but typically you'll need a credit score of 620 or higher. Taking out a HELOC will probably reduce your credit score temporarily when it appears on your credit report.
- Is a HELOC tax-deductible?
The interest you pay each year on a HELOC is tax-deductible up to a limit as long as the borrowed money is used to buy, build or substantially improve your home, according to the IRS. This requirement expires after the 2025 tax year.
