Home Equity Line of Credit (HELOC) FAQs
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A home equity line of credit (HELOC) could allow you to borrow money based on the value you’ve built up in your home for home improvements, education and other expenses.
Are you ready to explore what tapping into your home equity could do for you? Apply now!
What is a home equity line of credit?
A home equity line of credit converts the value of your home 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 HELOC can act either as a first or second mortgage, depending on whether you own your home outright. In either scenario, a HELOC will use your property as collateral.
How does a HELOC work?
You build equity as you 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 tap into that equity with a HELOC. With our HELOC, your entire loan amount is deposited into your account from the start, but once you start repaying that money, your available funds increase. You’ll then have the option to make additional draws on your line of credit.
What are the benefits of a HELOC?
Cash when you need it
You can borrow up to a certain limit and pay only interest on the amount you borrow. This makes it ideal for ongoing projects like home renovations, college tuition or unexpected expenses.
The flexibility to withdraw funds as needed and pay them back over time is a key benefit of a HELOC.
Lower interest rates
HELOCs generally offer lower interest rates compared to personal loans or credit cards. Your home serves as collateral, so lenders are willing to offer better rates than they would for unsecured loans. And you only pay interest on the amount you borrow, which helps keep costs down.
Flexible repayment options
During the initial phase of a HELOC that typically lasts 2-5 years, called the draw period, you can borrow funds up to your approved credit limit. You might only need to make interest payments during this time, which can help keep your monthly payments low when your budget is tight.
After the draw period, you enter the repayment phase, which is when you start paying back both principal and interest. This can last from 5-30 years.
Potential tax benefits
Depending on how you use your HELOC funds, you may have potential tax saving benefits. It's important to talk with a tax professional to understand how this could apply to you.*
Minimal restrictions on use
You can use the funds from a HELOC for just about anything.
While many homeowners use them for home-related expenses, you could also use a HELOC to consolidate high-interest debt, pay for a wedding or even taking a vacation.
How much can I borrow with a HELOC?
Your HELOC loan amount will be based mostly 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 85%.
With our HELOC, you can take out a line of credit for as much as $400,000, depending on your eligibility qualifications.*
What determines the interest rate on a HELOC?
Factors such as credit score, debt-to-income ratio, current mortgage interest rate and the equity you have built up in your home will help determine the interest rate for a home equity line of credit. It’s best to avoid large purchases that could add to your debt as you plan to apply for a HELOC.
What is the difference between a HELOC and a cash-out refinance?
A home equity line of credit allows you to borrow funds based on the value of your home for a set period of time called the draw period. You can borrow money more than once as you need it and only pay interest on the loan. Then you’ll pay back the principal including interest over a period of time called the repayment period.
A replaces your current mortgage with a larger loan*. You get back the difference in a lump sum to use for expenses such as home improvements, education or medical care. Because a cash-out refinance is essentially a new loan, you’ll start over with terms like 30 or 15 years.
How do you qualify for a HELOC?
Our underwriting team evaluates key factors when reviewing HELOC applications. Here are some guidelines to be aware of when you apply.
- Credit score: 640 minimum
- Debt-to-income ratio: 50% maximum
- Combined loan-to-value ratio: 85% maximum
- Property types: single-family houses, townhomes and condos are eligible
How do you apply for a HELOC?
Check your home’s equity
First, figure out how much equity you've got in your home. Most lenders want you to have 15% to 20% equity before they consider your application.
Review your credit score
If your score’s a bit lower, you can work on it by paying down some debts or fixing errors on your credit report. The better your score, the lower your interest rate, which can save you money over time.*
Evaluate your debt-to-income ratio (DTI)
Your DTI shows how much of your monthly income goes toward paying off debt. Lenders usually want this number to be under 43%, but lower is always better.
Gather necessary documentation
Gather the paperwork you’ll need, including proof of income, tax returns and recent mortgage statements.
Shop around for lenders
Different lenders offer different rates, terms and fees. It’s worth comparing several options to find the right deal for you.
Get an appraisal
Most lenders will require an appraisal to determine how much your home is worth. A good appraisal can increase your borrowing power, so it might be worth making small improvements before the appraiser comes over.
Complete Rate’s HELOC application
Once you and submit everything, you’ll go through a closing process similar to getting a mortgage. With our Digital Mortgage Application process, you can get funding in as little as five days.*
Review all the terms carefully to make sure you fully understand what you’re signing up for.
If you are ready to explore what tapping into your home equity could do for you, apply now!
*Rate, Inc.'s HELOC is a fixed-rate open-end product using your home as collateral. Not available in all states. Go to rate.com/HELOC for information including important property and borrower requirements and restrictions which impact rate and max available loan amount. Subject to approval.
* Our loan amounts range from a minimum of $25,000 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.
* Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Rate, Inc. for more information
* Rate, Inc. does not provide tax advice.
* Rate, Inc. does not provide credit counseling or credit repair services.
* Applications may be completed in five minutes but may fluctuate. 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. Texas borrowers will have a 12-day cooling period prior to closing on their home equity loan which will begin after the borrower has both filed a loan application and received consumer disclosures.
