Home Equity Line of Credit (HELOC) FAQs
A home equity line of credit (HELOC) isn't your typical home loan. Its unique structure can cause some confusion for borrowers, but don't let that deter you from taking advantage of your home equity.
You've got HELOC questions? We've got the answers. Learn all about a home equity line of credit — including our new HELOC* — with our FAQ.
Frequently asked questions about HELOCs
- What does HELOC mean?
- How does a HELOC work?
- How long will my HELOC last?
- How do I repay my HELOC loan?
- How much money can I borrow with a HELOC loan?
- How much equity do I have in my house?
- How do I find my home’s appraised value?
- What can I use my HELOC funds on?
- How do HELOC rates work?
- How do I qualify for a HELOC loan?
- Does a HELOC make sense for me?
- Our HELOC vs. traditional HELOC
- HELOCs vs. home equity loans
- HELOCs vs. cash-out refis
- How do I apply for a HELOC?
What does HELOC mean?
A HELOC means home equity line of credit and it's a revolving credit line that converts your home equity into funds you can withdraw at any time during your draw period. While your balance starts at zero with a traditional HELOC, our HELOC gives you all of your funds up front with an option to draw more money as you repay your balance.
A home equity line of credit can act either as a first or second mortgage, depending on if you own your home outright. In either scenario, a HELOC will use your property as collateral.
How does a HELOC work?
HELOC loans are based on your home’s available equity — or your interest stake in the property. Home equity tells you how much of your home’s total value belongs to you vs. your bank or lender.
You build equity as you continue to make mortgage payments each month. You can also gain equity if your property value goes up due to housing market changes or improvements you make.
You can open a line of credit to tap into that equity with a HELOC. With a traditional home equity line of credit, you can withdraw funds whenever you want during the draw period. When you use your funds, your available balance goes down. However, as you make payments on your outstanding balance, you can replenish your available funds.
Our HELOC works a little bit differently. Think of it as a cross between a traditional HELOC and a home equity loan. Your entire loan amount is deposited into your account from the start, but once you start repaying that money, your available funds will increase and you’ll have the option to make additional draws on your line of credit.
How long will my HELOC last?
Traditional HELOCs can last as long as any conventional mortgage — 20-30 years total, although they’re split between a draw period and repayment period.
With our home equity line of credit, the draw period runs 2-5 years, but the full life of the loan can last as long as 30 years with repayment. If you use our HELOC, you’ll have a variety of term options to choose from:
Term length | Draw period | |
5 years | 2 years | |
10 years | 3 years | |
15 years | 4 years | |
30 years | 5 years |
How do I repay my HELOC loan?
A traditional HELOC may allow you to defer payments on the loan principal until the draw period ends. You’ll make monthly payments, as you would with any type of mortgage, until the loan has been repaid in full. On a traditional 30-year HELOC, the repayment period may run 20-30 years after a 10-year draw period. Your payments will need to cover both your outstanding loan balance and any interest that has accumulated.
If you’re using our HELOC, then repayment starts as soon as your lump-sum deposit lands in your bank account. You’ll pay both the principal and interest each month for the duration of your amortization schedule. In many cases, that will last 30 years, but other loan terms may be available.
How much money can I borrow with a HELOC loan?
Your HELOC loan amount will be largely based on your home equity. Keep in mind that lenders are unlikely to extend a line of credit that matches your full amount of equity, though. Lenders will check home values, income, debt and credit score to determine the amount of money you can borrow. In some cases, we may approve a home equity line of credit with a combined loan-to-value (CLTV) ratio as high as 95%.
Lenders will also check for any risk factors in your financial history that might suggest a lower HELOC amount would be better. Some of these risk factors include:
With our HELOC, you can take out a line of credit for as much as $400,000, depending on your eligibility qualifications.**
How much equity do I have in my home?
Figuring out your home equity is pretty simple: just subtract your remaining loan balance from the appraised value of your property:
Appraised home value - loan balance = home equity
How do I find my home’s appraised value?
A lender will typically schedule a home appraisal to determine the fair market value of your property if you’re using a traditional HELOC.
When you apply for a home equity line of credit with us, though, no in-person appraisal is needed. An automated valuation model will determine your home’s value. Not only does this speed up the approval process, but it eliminates the hassle of having someone come to your home to conduct an appraisal.
What can I use my HELOC funds on?
Once your line of credit is open, you’re free to spend that money in a variety of ways. Some of the most common uses for a HELOC include:
- Consolidating high-interest debt like credit cards
- Covering major expenses like home renovations
- Paying for recurring costs like college tuition
How do HELOC rates work?
Traditional HELOCs usually use variable interest rates rather than fixed rates. Variable rates readjust at regular intervals to reflect changes in the economic and lending environments. Most notably, variable rates are closely tied to the prevailing index rate — also known as the Prime Rate.
When using a traditional HELOC, it’s important to realize that the rate you’re offered is the introductory period rate. Your rate can — and likely will — routinely fluctuate. Traditional HELOC rates can readjust as often as once a month. This means the amount of interest you owe could change multiple times throughout the life of your home equity line of credit.
On the other hand, our new HELOC offers a fixed interest rate, so you don’t have to worry about your rate changing at all. This way, you can better anticipate how much interest you’ll owe each month and in total.
How do I qualify for a HELOC loan?
When reviewing HELOC applications, our underwriting team evaluates a few key factors:
- Credit score: 620 minimum
- Debt-to-income ratio: 50% maximum
- Combined loan-to-value ratio: 90% maximum
- Property types: single-family houses, townhomes and condos are all eligible
Does a HELOC make sense for me?
Our HELOC product makes sense if you need to gain more financial flexibility in a hurry. Our fast time-to-fund window means you could have access to a new line of credit in as little as five days.***
Getting a home equity line of credit through us is a good fit for people who want to tap into a new source of funds as quickly as possible. This type of HELOC makes sense if you need more financial flexibility to pay for a mid-to-large expense on relatively short notice — think home renovations, debt consolidation and college tuition.
Our HELOC vs. traditional HELOC
Our new HELOC product offers an exciting alternative to traditional HELOC loans, helping you access a line of credit and tap into your equity faster than ever:
Our HELOC | Traditional HELOC | |
Rate type | Fixed | Variable1 |
Draw period | 2-5 years | Often 10 years2 |
Application process | 100% digital | Mix of digital and manual |
Our HELOCs also offer a fast application process; you could have your HELOC funds in your bank account within 5 days of loan approval.
1https://consumer.ftc.gov/articles/home-equity-loans-home-equity-lines-credit
2https://time.com/nextadvisor/loans/home-equity/what-to-know-before-heloc-draw-period-ends/
HELOCs vs. home equity loans
Some lenders offer home equity loans. These will also allow you to use the equity you’ve accumulated in your home. Like our HELOC, you’ll receive your funds in a lump sum payment, but you won’t have the option to make additional draws after that deposit. One downside to home equity loans: They typically have higher interest rates than traditional or our HELOCs.
There are several other notable differences separating these financing options:
Traditional HELOC3 | Home equity loan | Our HELOC | |
Rate type | Variable rate | Fixed rate | Fixed rate |
Disbursement method | Revolving line of credit | One-time payment | Lump sum with additional draw flexibility |
Monthly payment | May vary across the life of the loan | Stays the same throughout the life of the loan | Stays the same throughout the life of the loan |
Repayment options | Interest-only draw period may be available | Repayment starts immediately | Repayment starts immediately |
3https://consumer.ftc.gov/articles/home-equity-loans-home-equity-lines-credit
HELOCs vs. cash-out refis
A cash-out refi is another popular way to turn home equity into money in your pocket. It is a vastly different financial vehicle compared with a home equity line of credit, though, regardless which type of HELOC you use:
Traditional HELOC | Cash-out refi | Our HELOC | |
Rate type | Variable rate | Fixed and adjustable rate options | Fixed rate |
Disbursement method | Revolving line of credit | One-time payment | Lump sum with additional draw flexibility |
Notably, interest rates for HELOCs are typically higher than cash-out refis, while closing costs for cash-out refis are typically higher than HELOCs.
How do I apply for a home equity line of credit?
Applying for a HELOC with us is fast and easy. Our 100% digital application can be completed within 10 minutes. If approved, you can expect to receive your funds as soon as five days from loan approval.
Head over to our digital application to get started on your HELOC today.
*Rate, Inc. home equity line of credit (HELOC) is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. This product is currently not offered in the states of New York, Utah, Kentucky, South Carolina, Hawaii, Texas, West Virginia, Delaware and Maryland. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact Rate for more information and to discuss your individual circumstances. Restrictions Apply.
**Our loan amounts range from a minimum of $20,000 to a maximum of $400,000. For properties located in AK, the minimum loan amount is $25,001. Your maximum loan amount may be lower than $400,000 and will ultimately depend on your home value and equity at the time of application. We determine home value and resulting equity through independent data sources and automated valuation models.
***Approval may be granted in five minutes but may be subject to verification of income and employment. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing. In addition, funding timelines may be longer if we cannot readily verify that your property is in at least average condition with no adverse external factors with a property condition report and may need to order a desktop appraisal to confirm the value of your property.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate, Inc. Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
For more information about HELOCs go to https://files.consumerfinance.gov/f/201401_cfpb_booklet_heloc.pdf