What Is a HELOC, And How Do I Get One?

While the housing market has cooled somewhat recently, over the past several years, many of us have seen the values of our homes increase substantially. In fact, at the end of 2021 the average homeowner had a record-high $185,000 in tappable equity, mortgage-data provider Black Knight found. That’s triggered a spike in demand for home equity lines of credit (HELOCs), says Bill Cook, chief lending officer at NextMark Credit Union in Fairfax, Virginia. 

Thinking about tapping into your home equity? Here’s what a home equity line of credit is, its pros and cons, and how to qualify for one. 

What is a HELOC? 

A home equity line of credit, or HELOC, is a line of credit that allows you to borrow against your home. Like a credit card, you have a set amount of money you can borrow, and “you can spend the money however you choose,” says Heather McRae, a senior loan officer at Chicago Financial Services. 

As you draw on your line of credit, the balance on your HELOC goes up, and your available credit is replenished as you repay the debt. 

“It’s basically a VISA card against your house,” says Laurel, Maryland-based home equity specialist Terri Wilcox. In fact, several lenders provide borrowers with a credit card they can use to access their HELOC funds. 

Unlike a credit card, a HELOC has what’s called a “draw period” — a specified period when you can borrow the money. During this period, you must make minimum monthly payments set by your lender. When the draw period ends, you may be required to either pay off your balance all at once or repay the debt over a certain time, sometimes between five and 20 years. 

How much you can borrow depends on how much equity you have in your home. Typically, a lender will allow you to borrow up to 80 percent of your home’s appraised value, minus what you still owe on it. 

Let’s say your house is worth $100,000, and you owe $40,000 on your mortgage. If you take 80 percent of your home’s value, or $80,000, and then subtract the $40,000 you owe on it, you’d be left with $40,000 — meaning you’d likely qualify for a line of credit of $40,000. 

Some lenders may let you borrow up to 85 percent of your home’s value or higher, depending on your credit score and debt-to-income ratio (see Who qualifies for a HELOC? below). 

What are the pros and cons of a HELOC? 

While your home equity can be a great way to access funds, it’s important to consider your complete financial picture before borrowing against your house. 

Pros of a HELOC 

HELOCs offer relatively low rates. Because the line of credit is secured with your home, HELOCs tend to offer lower interest rates than other similar types of loans.  

You have flexible access to the funds. Just because you get a $40,000 HELOC doesn’t mean you have to use all $40,000 at the same time. You could decide to borrow $2,000 now and use the rest later. You’ll owe interest only on the amount that you actually borrow, not the limit you’re approved for. 

It’s an interest-only loan during the draw period. While you can pay back some or all of what you have borrowed at any time, you’re only required to make interest payments during your draw period.  

Cons of a HELOC 

It typically has a variable interest rate. Just like the interest rate on your credit card, a HELOC’s rate is usually variable, which means it could go up (or down) in the future. 

If you can’t repay the loan, you could lose your house. Because the loan is secured with your house, if you can’t repay it, you could lose your home. 

Who qualifies for a HELOC?  

Lenders generally require borrowers to have a minimum credit score to qualify. Another factor is a borrower’s debt-to-income, or “DTI” ratio — how much they owe in debt obligations, like credit card and mortgage payments, divided by the sum of money they make from their job, part-time work, alimony or income-producing assets (such as stocks). 

While a HELOC can be a great way to access equity in your home, it’s not always a good idea. A financial advisor can help you look at your entire financial picture and show you how individual pieces like tapping your home’s equity fit with the rest of your plan.