What is a Home Equity Line of Credit (HELOC)?
One of the perks of homeownership — and there are plenty — is the opportunity to build equity. With every mortgage payment you make, you’ll steadily accumulate equity in your home, which can be used in a variety of ways. Pay bills, cover the costs of home renovations, fund your next big vacation — you name it.
You have a few options as far as how you tap into that equity, but one of the most popular approaches is with a home equity line of credit, or HELOC. A traditional HELOC gives you access to an open line of credit to draw from whenever you need it.
In the right circumstances, a HELOC loan can give you the financial flexibility you need to cover unexpected costs, major expenses and anything else life throws your way. Let’s take a look at how both traditional HELOCs and our HELOCs work so you can decide if a home equity line of credit is right for you.*
Do you already know that a home equity line of credit is right for you? Apply today and get started on the path to leveraging your home equity.
What is a home equity line of credit?
A HELOC is unlike any other home loan you might apply for, with a somewhat unique disbursement method and repayment plan. So it’s good to understand what exactly a HELOC is before agreeing to any loan terms.
What is a HELOC?
A HELOC is a revolving line of credit that turns your home equity into money you can use for just about anything. Like other home loans, a HELOC uses your property as collateral. It can also — but not always — act as a second mortgage on your home, which would mean owing two separate payments each month. If you’ve already paid off your existing home loan, though, you can still get a HELOC with your accumulated equity.*
How does a HELOC work?
Once you’re approved for a traditional home equity line of credit, you’ll be able to pull funds from it as the need arises. Whenever you withdraw money from your line of credit, your available funds go down. But as you repay your HELOC loan, you’ll be able to replenish those funds.
Rate’s HELOC works a little bit differently. It’s still a line of credit, but the full amount will be deposited in your bank account after loan approval. There’s no pay-as-you-go option, but you have the flexibility to draw more funds after you’ve started to pay back your initial deposit.
Think of a Rate HELOC as the middle ground between a traditional HELOC and a home equity loan. You’ll receive a one-time deposit just like a home equity loan — but with the option to tap into a revolving line of credit once you replenish some or all of those funds.
How much can you borrow with a HELOC?
No matter what type of HELOC you’re using, the size of the loan is directly determined by the amount of equity you’ve accumulated in your house. Figuring out how much equity you have in your home is relatively simple: Subtract the remainder of your mortgage balance from the appraised value of your home.
That doesn’t necessarily mean lenders will give you a HELOC mortgage for the full amount of your home equity. In fact that’s extremely unlikely to happen. Many lenders limit how much equity can be used for a HELOC, evaluating your home value, income, debt and credit score to determine the amount of money you can borrow. In some cases, we may approve a HELOC with a combined loan-to-value ratio (CLTV) as high as 95%.**
Also, keep in mind that none of this accounts for individual loan qualifications. Just like they would with any other home loan, lenders will review your financial history before setting the terms of your HELOC, including:
- Credit score
- Debt-to-income ratio
- Employment status
- Income streams
After weighing your risk factors, your lender will decide how much money to extend as a home equity line of credit. That number could very well be lower than 80% of your accumulated equity, depending on the amount of risk your financial situation presents.
How do home equity line of credit rates work?
Mortgage rates are informed by many factors, ranging from the federal funding rate and bond market movement to mortgage lending industry trends and the state of the housing market.
HELOC loans traditionally feature variable rates based on the current prime lending rate. These variable rates can — and likely will — change over the entire life of the loan. That’s not the case with a Rate HELOC, though. You’ll have a fixed rate on your home equity line of credit, so it’ll be easier to budget around your HELOC payments.
The only time your rate might change would be if you draw additional funds from your line of credit. At that point, the fixed rate on your new draw might be different than it was on the original loan. But, otherwise, you won’t need to worry about your rate fluctuating throughout your amortization schedule.
Keep in mind, as you pay down your original loan, you may be able to make additional draws within your approved line of credit. That means you could have multiple fixed rate loans open at the same time. But the interest rate on your initial draw won’t change; just on any subsequent draws you make.
What are the benefits of a HELOC?
There are a few different financing options that let you extract home equity — cash-out refis and home equity loans being the two major alternatives. And if you want to open a new line of credit, a credit card can do that without requiring you to use your home as collateral.
So why choose a home equity credit line over those other options? Consider the many benefits a HELOC offers:
Top HELOC benefits
- HELOCs let you transform your home equity into a revolving line of credit. This is money you’ve already invested into your home; you’re just putting it toward a different use.
- Once you start repaying your balance, your credit line lets you take out money when you need it so you can tackle new expenses as they come up: ongoing renovations, medical bills or college tuition hikes.
- Home equity line of credit rates can vastly outperform interest rates on credit cards — we’re talking single digit vs. double digits. That may mean you’ll owe less interest over the life of the loan compared with a similar credit card balance.
- HELOCs typically offer lower closing costs compared with other types of loans.
- Rate’s HELOC offers a short time to fund, so you can open a line of credit in as little as 5 days.***
Are there different types of HELOCs?
HELOC loans haven’t changed much over years — that is until now. Our new home equity line of credit offers more options for you to consider:
- A fixed rate instead of the traditional variable rate
- A shorter draw period
- A completely digital application process
- A faster time to fund
If you need funds quickly, but don’t want to be hampered by the high interest presented by a personal loan or credit card, then this new HELOC option could be a great alternative. That’s especially true for anyone looking at a mid-to-large expense like a home renovation project or consolidating other debts such as a personal loan or credit card.
How to get a home equity line of credit
A HELOC mortgage can be really useful under the right circumstances. It can open up new sources of funding to pay for both recurring costs and one-time expenditures. Although HELOC loans are often associated with home renovations and repairs, your options aren’t limited to just home improvement projects. You can spend the money any way you like.
Once you’re ready to tap into your home equity, you can start your application right away. Today’s digital mortgages allow for a quick-and-easy application process that cuts down the time to fund from weeks to mere days. If approved, you’ll have a new home equity line of credit at your fingertips before you know it.
*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 HELOC go to https://files.consumerfinance.gov/f/201401_cfpb_booklet_heloc.pdf