How To Apply For a Heloc
Your home is more than just a place to live; it's an asset that can help you achieve big financial goals such as home improvements, college costs, or settling debt.
This is possible through a home equity line of credit (HELOC), which lets you borrow against the value of your home and only pay interest on the amount you borrow.
If you want to use the value of your house or real estate to your advantage, this guide will walk you through the steps and things you should think about.
Find out how easy it is to apply for a Rate HELOC and how it can help you reach your specific financial goals.
What is a HELOC and How Does it Work?
A HELOC, or home equity line of credit, lets homeowners tap into the value of their home by borrowing against the amount of equity in their home. Unlike a first mortgage or second mortgage, a HELOC gives you a flexible credit line to use or make withdrawals from.
During the draw period, you can make interest payments, while the repayment period requires you to start paying back the full loan balance.
HELOCs typically come with a variable rate tied to the prime rate, which is the interest rate that lenders use as a baseline to set rates for different loans, including HELOCs, personal loans, and credit cards.
5 Steps To Apply For A HELOC
Getting a HELOC doesn’t have to feel overwhelming. By breaking it into simple steps, you can confidently tap into your home’s equity to tackle your financial goals. Here’s how:
1. Know Where You Stand
Start by going over your finances, including your monthly income, credit report, and current mortgage balance. Lenders use your loan-to-value ratio (LTV) to determine how much equity you can borrow—most require at least 15-20% equity. Preparing before you’re ready by improving your credit score or managing your LTV, can increase your chances of approval.
2. Decide What You Need
Think about how you’ll use the HELOC, whether for home renovations, debt consolidation, or other big expenses. Decide between a credit line with flexibility during the draw period or a home equity loan offering a lump sum. Also, consider whether a fixed interest rate or variable rate fits your financial situation.
3. Find A Lender That Works For You
Compare loan option terms from banks, credit unions, and online lenders to find the best HELOC rates, fees, and flexibility. Ask about annual fees, closing costs, or whether your interest is tax deductible.
A lender that aligns with your personal finance goals can make the process easier and more cost-effective.
4. Get Your Documents Ready
Get the important paperwork together like proof of monthly income, your current mortgage details, and possibly a home appraisal. Mortgage lenders use this information to confirm your amount of equity and calculate your loan balance. Being prepared can help speed up approval.
5. Apply And Plan For The Future
Submit your home loan application online or in person and review the terms carefully. Understand your repayment period, HELOC interest payments, and how HELOC works over the life of the loan. With a solid plan, you can put your home equity to work for projects or long-term goals.
What To Consider Before Applying
HELOCs give you options, but you need to think about a few things before you apply, including:
Impact On Existing Home Equity
A HELOC takes money out of your home equity, which lowers your ownership stake. If you want to sell your home soon, having less equity could be less profitable for you.
Also, if the housing market goes down, the value of your home may go down, which could make it harder for you to sell or refinance.
Think about how much equity you can safely use and make sure you leave some wiggle room, especially if you have other big plans that involve leveraging your house.
Fixed Vs. Variable Interest Rates
Most of the time, you can pick between a set or variable interest rate on a HELOC. If you have a set rate, your monthly payments will stay the same. This can help you plan your budget, which is especially helpful if you plan to keep the HELOC for a long time.
Variable rates, however, change based on the market, which can make monthly payments hard to plan for. They might have lower payments at first, but can rise over time if interest rates increase.
Why Credit Score Matters
Your credit score is a big part of whether or not you can get a HELOC. It also affects how much you can borrow and how much interest you pay. Higher numbers show that you are less of a risk to lenders, which can help you get lower interest rates and higher credit limits.
Most lenders want a score of at least 620, but a score above 700 can get you better terms and increase your chances of being approved. Getting your credit score higher before you apply can save you a lot of money, especially if it gets you into a lower interest rate range.*
Potential Fees And Closing Costs
Fees for HELOCs can add up, so it's a good idea to plan for them ahead of time. There are usually appraisal fees to find out how much your home is worth now, yearly fees to keep the line of credit open, and closing costs that are similar to mortgage fees.
These fees are different for each loan, and some lenders don't charge them at all to stay competitive. To avoid any surprises, ask your lenders to give you a list of all their fees.
Are Student Loans Considered When Getting A HELOC?
Most of the time, student loans are counted as debt, which could limit how much more debt you can take on with a HELOC. This could change your DTI ratio and, in turn, your chances of getting approved.
To improve your chances of getting accepted, make sure that your student loans are within your budget, and think about how the extra HELOC payments would affect your total financial stability.
HELOC Requirements
Here is a list of the most common qualifying requirements you'll need to meet.
Minimum Home Equity Requirements
Most lenders want you to have at least 15-20% equity in your home in order to get a HELOC. The lender is less likely to lose money because this wealth is used as collateral for the loan.
Keeping a healthy equity cushion also keeps you from taking on too much debt, which is good for your long-term financial health and freedom.
Proof Of Income And Employment Stability
If your credit score or debt-to-income ratio isn't perfect, having a background of steady income makes your application much stronger. Lenders usually want to see proof of a steady income to make sure you can make your HELOC payments on time.
To prove your employment, you need to provide recent pay stubs, W-2 forms, tax returns, and sometimes more proof of employment are all .
If you are self-employed, you may be asked to provide extra proof of income, like bank records or a longer work history, to make sure your income is consistent and reliable.
Credit Score And Debt-To-Income Ratio
Your credit score and Debt-to-income (DTI) ratio are very important for getting a HELOC. A good credit score (usually 620 or higher) can help you get better interest rates, and a DTI ratio that's not too high shows lenders that you're not taking on too much debt.
A DTI ratio of less than 43% is preferred by most lenders, but requirements can be slightly different based on the lender. When put together, these two things give lenders a full picture of your finances, which helps them decide if a HELOC is a good choice for you.
Alternatives To A HELOC
If you don't think a HELOC is right for you, you can still get access to the equity in your home in other ways through different types of loans. Each of these options has its own pros, so you should look into them all to see which one fits your financial goals the best.
HEA Vs. HELOC
A Home Equity Agreement (HEA) is a creative way to borrow against the value of your home without taking on more debt.
An HEA is different from a HELOC because you sell a piece of your home's future value to an investor instead of taking out a loan and paying it back every month.
This deal can give you cash right away without adding to your monthly payments, which makes it a good choice if you want to avoid traditional loan designs.
Keep in mind, though, that when you sell your house, you'll have to split some of the money with the owner.
Reverse Mortgage Line Of Credit
A reverse mortgage line of credit can give people aged 62 and up a flexible way to get money from their home's value.
You borrow against the value of your home with this choice, but unlike a HELOC, you don't have to make monthly payments as long as you live in the home. Instead, you pay back the loan when you sell the house or die, and the loan amount is taken out of the money from the sale.
This choice is great for retirees who want to make extra money or improve their cash flow without having to worry about their monthly bills.
Just remember that reverse mortgages can lower the value of your home so it's important to talk to your family about this choice if you need to.
Cash-Out Refinance
When you do a cash-out refinance, you get a new loan that is bigger than your old mortgage. This lets you take the difference as cash.
This choice might be best if you want a big sum instead of a line of credit that you can use whenever you need it. Because it's easy to use your home's value as collateral, it's often used for bigger costs like home improvements.
But because refinancing changes or extends your mortgage terms, it's usually used by people who plan to stay in their home for a while.
Get Started With Your HELOC Application Today
A HELOC can be useful because it gives you options and lets you get money when you need it most. What you need to do to make the best choice for your financial future is to understand how to apply and what to expect.
Start your journey today at Rate's HELOC and find out how the value of your home can help you in more ways.
*Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Rate, Inc. for current rates. Restrictions apply.