A HELOC — home equity line of credit — lets you borrow against the equity in your home. Unlike a regular loan, you get a credit line you can draw from as needed, much like a credit card.
How a HELOC Works
Your lender sets a credit limit based on your home’s value minus what you owe on your mortgage. During the draw period (usually 10 years), you can borrow up to that limit, repay it, and borrow again. After the draw period ends, the repayment period begins — typically 20 years.
HELOC vs. Home Equity Loan
A home equity loan gives you a lump sum at a fixed interest rate. A HELOC is a revolving line with a variable rate. If you need money in chunks over time — like for home renovations — a HELOC often makes more sense. If you need one large payout, a home equity loan may be better.
HELOC Interest Rates
HELOCs carry variable rates tied to the prime rate. When rates rise, your payment rises too. Some lenders let you lock a portion of your balance into a fixed rate.
What Can You Use a HELOC For?
- Home renovations
- Paying off high-interest debt
- Education expenses
- Emergency fund backup
Interest may be tax-deductible if you use the funds for home improvements — check with a tax advisor.
The Risk: Your Home Is Collateral
A HELOC is secured by your home. If you can’t make payments, you could lose your house. Never use a HELOC for discretionary spending or anything that doesn’t have a clear payoff plan.
How to Qualify for a HELOC
Lenders typically require:
- At least 15–20% equity in your home
- A credit score of 620 or higher (700+ for better rates)
- A debt-to-income ratio below 43%
- Proof of income and stable employment history
Is a HELOC a Good Idea?
A HELOC works well for homeowners with significant equity who have a specific, high-value use for the funds. The variable rate is the main risk. If interest rates spike, your monthly payment could jump substantially. Make sure you have a plan to pay it off.