What is a Home Equity Line of Credit (HELOC)?
Owning a home isn’t just about having a place to call yours, it can also give you access to money when you need it most. Maybe that leaky roof finally needs fixing, or a surprise medical bill landed in your lap. Sometimes, life just happens.
That’s where a home equity line of credit (HELOC) comes in. It lets you tap into the value of your home and borrow what you need, when you need it, kind of like a credit card, but usually with a lower interest rate.
Curious if it’s the right tool for you? Let’s break it all down. And if you’re ready to explore your options, Rate’s HELOC could be a top choice for you.
What Is a HELOC?
A home equity line of credit (HELOC) is a type of loan that lets homeowners borrow money based on their available equity, the difference between their home’s value and what’s still owed on their first mortgage.
It’s a financial product that offers flexibility when you need funds for projects, emergencies, or even everyday expenses.
Unlike a home equity loan, which provides a lump sum upfront, a HELOC works more like a credit line. You can access cash during a set period, up to a credit limit determined by your lender.
This period, called the draw period, typically lasts 5 to 10 years. You can use your HELOC funds for home improvement, medical bills, or other financial needs, giving you more freedom than a traditional second mortgage or personal loan.
A HELOC makes it happen.
The money you already have in your house can fund your dreams. Tap into your home's equity at a rate lower than most credit cards for life's biggest purchases.
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How Does a HELOC Work?
A HELOC lender sets your credit limit based on factors like the current value of your home, your credit score, amount of equity, and financial situation.
Once approved, you’ll receive access to a revolving credit line, similar to a credit card, which lets you borrow, repay, and borrow again within your draw period.
During this time, you can take out HELOC funds whenever needed, whether through online banking, a mobile app, or checks. You can borrow small advances or larger sums, depending on your credit line.
This flexibility is what makes a HELOC such a useful tool for homeowners managing financial needs over time.
How Do You Pay Back a HELOC?
A HELOC loan has two key phases, and understanding both is important:
A HELOC makes it happen.
The money you already have in your house can fund your dreams. Tap into your home's equity at a rate lower than most credit cards for life's biggest purchases.
Get started
Draw Period
This phase, typically lasting 5 to 10 years, is when you can borrow from your credit line. During this time, you often only need to pay interest on the balance, meaning your monthly payment may be lower.
However, since you’re not paying down the loan amount, your balance can stay the same if you don’t repay anything toward the principal.
Repayment Period
Once the draw period ends, the repayment period begins. This typically lasts 10 to 20 years, and your monthly payment will likely increase twice as you start paying back both the principal and interest.
Depending on your HELOC terms, this shift can be large, especially if you’ve borrowed a large amount.
Most HELOCs have a variable interest rate, meaning your HELOC rate can rise or fall based on the prime rate and other factors. This can cause your monthly interest payment to fluctuate, impacting your budget.
Some HELOC lenders offer a fixed-rate HELOC, allowing you to convert part of your balance to a fixed interest rate, giving you more stability in your monthly payment.
Can You Deduct HELOC Interest on Your Taxes?
The Tax Cuts and Jobs Act changed the rules for HELOC interest deductions, so you can’t just deduct interest like before.
Now, you can only deduct HELOC interest if the money is used specifically for home improvement purposes, like building an addition or upgrading your kitchen. Using HELOC funds to cover medical bills or pay down credit card debt won’t qualify for deductions.
Tax rules can be tricky, so it’s always smart to get legal advice or talk to a tax professional to understand how these rules fit into your financial decision.
Will a HELOC Impact Your Credit Score?
Yes, a HELOC can affect your credit score. When you apply, lenders will pull your credit report, which can cause a small dip in your score. Once open, the amount you borrow compared to your credit line—called your credit utilization—also plays a role.
If you regularly max out your line amount or carry a high balance, it could lower your credit score. But if you borrow and repay responsibly, a HELOC can actually help improve your credit over time, showing lenders you can manage different types of credit lines.
HELOC Requirements
If you’re considering a HELOC, you’ll need to meet certain lender requirements before you can access funds. These criteria help HELOC lenders determine your ability to repay the credit line and manage potential financial risk.
Credit Score
Most financial institutions require a credit score of at least 620 to qualify for a HELOC, but having a higher credit score can help you secure the lowest rate. A strong credit report signals to lenders that you’re a responsible borrower, reducing their risk.
If your credit score is lower, you may still qualify, but expect a higher interest rate or additional requirements, like a lower credit limit or a higher minimum amount you need to borrow.
DTI (Debt-to-Income Ratio)
Lenders evaluate your DTI, the percentage of your monthly income that goes toward debt payments, to ensure you can handle another financial product. A DTI below 43% is ideal, as it shows lenders that your financial situation is stable.
If your DTI is too high, reducing existing debt, like credit card balances or a personal loan, may improve your chances of approval.
Home Equity
Your home equity is the difference between your home’s value and what you still owe on your first mortgage. To qualify for a HELOC, you typically need at least 15-20% equity in your borrower’s home.
The more equity you have, the higher your potential credit limit and the better your HELOC interest rate may be.
Property Appraisal
Lenders require a property appraisal to confirm the current value of your home. This ensures they are lending based on accurate market value and helps determine your loan amount.
Some lenders offer automated appraisals, but in many cases, a professional appraiser will need to assess your home in person, which may come with an origination fee or other costs.
How Much Can You Borrow With a HELOC?
Your HELOC lender will calculate your credit limit based on your home equity, outstanding loan balance, and overall financial situation. Most financial institutions allow homeowners to borrow up to 85% of their home’s value, minus what’s still owed on their first mortgage.
For example, if your home’s value is $400,000 and your remaining mortgage balance is $250,000, the total amount of equity available could be $150,000.
If your lender allows borrowing up to 85% of that, your maximum line amount would be $90,000. However, your actual credit limit depends on your credit score, DTI, and other factors.
Pros and Cons of a HELOC
A HELOC gives you flexible access to cash, but it comes with trade-offs. Understanding the pros and cons can help you decide if it’s the right move for your financial situation.
Pros
- Lower interest rate than a credit card or personal loan
- Borrow money on an as-needed basis
- Interest may be tax-deductible for home improvements
- Flexible repayment period options
Cons
- Payments may increase due to variable rates
- Your home is collateral, risk of foreclosure
- Some lenders charge an annual fee, origination fee, or early closure fee
Is a HELOC the Right Move for You?
A HELOC can be a good idea for different financial needs. Since it offers flexible access to funds with a lower interest rate than most credit cards or personal loans, many homeowners use it to manage major expenses or take advantage of financial opportunities.
You’ve Got a Few Home Upgrades in Mind
A HELOC can be one of the best ways to fund home improvement projects like kitchen renovations, roof repairs, or adding a new bathroom. Since these upgrades can increase your home’s value, they may also help you build more equity over time.
You Need Funds to Keep Your Small Business or Side Gig Running
Instead of relying on a credit card or a higher interest rate personal loan, many business owners use HELOC funds to cover operating expenses, invest in growth, or bridge income gaps.
The flexibility of a revolving credit line allows you to borrow only what you need and repay it on an as-needed basis.
You Want Backup for Medical Bills
Unexpected medical bills can put stress on your finances. A HELOC provides a safety net, giving you access to funds without having to deplete your savings or rely on high-interest financing options.
You’re Tackling Fix-and-Flip Real Estate Projects
Real estate investors often use HELOCs to finance property renovations before selling. A HELOC loan offers a convenient way to cover renovation costs without requiring an upfront lump sum, allowing investors to finance repairs as they go.
You Need to Smooth Out Your Income Ups and Downs
Freelancers, commission-based workers, and seasonal employees sometimes experience unpredictable income. A HELOC can help cover expenses during slow months while offering the flexibility to repay the credit line when income picks up.
How to Apply for a HELOC Today
A home equity line of credit can be a smart way to tap into your home’s value when you need extra funds, but it’s important to borrow wisely.
Whether you’re planning a home improvement, covering a medical bill, or just looking for a flexible financial tool, a HELOC gives you access to money on an as-needed basis—often with a lower interest rate than a credit card or personal loan.
If you're ready to put your home equity to work, Rate’s HELOC options make it easy to get started with competitive rates, flexible terms, and a seamless application process.
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, Kentucky, 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, Inc. for more information and to discuss your individual circumstances. Restrictions Apply.
