Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by the equity in your home. Think of it like a credit card with your house as collateral — you're approved for a maximum borrowing limit, and you can draw from it, repay it, and draw again as needed during the draw period.

HELOCs have two distinct phases. The draw period typically lasts 5–10 years. During this time, you can borrow up to your limit whenever you need funds, and you usually only have to make interest-only payments on the outstanding balance. The repayment period follows, typically lasting 10–20 years, during which you can no longer borrow and must repay both principal and interest — this is when monthly payments can increase substantially.

HELOC interest rates are variable, typically tied to the prime rate plus a margin. When the Federal Reserve raises rates, your HELOC rate goes up; when it cuts rates, your rate goes down. Some lenders offer fixed-rate HELOC conversions that let you lock in the rate on a portion of your outstanding balance.

HELOC lenders evaluate your home equity, credit, and income stability:

• Home equity: Most lenders require at least 15%–20% equity in your home after the HELOC is factored in. If your home is worth $500,000 and you owe $350,000 on your first mortgage (70% LTV), you have 30% equity — solidly eligible for a HELOC.
• Combined LTV (CLTV): Lenders cap the total of your first mortgage plus the HELOC at 80%–85% of the home's appraised value. On a $500,000 home, that's a $400,000–$425,000 CLTV maximum. Subtract your existing mortgage to find your available HELOC limit.
• Credit score: Typically 620 minimum; 680–700+ for the best rates and highest credit limits. HELOCs are second liens, so lenders price credit risk carefully.
• Debt-to-income ratio: Generally 43% or below, calculated including the new HELOC payment at the maximum interest-only draw amount.
• Stable income: Two years of consistent employment history or self-employment income. Lenders want confidence that you can make payments if you draw the full line.

HELOCs are not purchase loans — there's no down payment. Instead, your eligibility revolves around equity and credit:

• Credit limit formula: Your HELOC credit limit = (home value × max CLTV %) − outstanding first mortgage balance. Example: $500,000 home × 80% = $400,000 maximum CLTV. With a $300,000 first mortgage, your HELOC credit limit is $100,000.
• Credit score and rate: Your credit score directly determines the margin added to the prime rate. Higher scores mean lower margins and lower rates throughout the draw period.
• No cash needed to open: Most HELOCs have minimal closing costs — sometimes as low as $0 to $500 — though some lenders charge origination fees and appraisal costs of $500–$1,500.

HELOC costs are typically lower than a cash-out refinance since you're not replacing your entire mortgage:

• Closing costs: Generally $0–$1,500, sometimes up to 2–5% of the credit limit for larger lines. Many banks and credit unions offer "no closing cost" HELOCs, though the rate may be slightly higher in exchange.
• Annual fee: Some lenders charge an annual fee of $50–$100 to keep the line open, even if you don't draw from it.
• Inactivity fee: Some HELOCs charge a fee if you don't draw from the line within a certain period.
• Early termination fee: If you close a HELOC within 2–3 years of opening it, some lenders claw back the closing costs they waived.
• No mortgage insurance: HELOCs don't require private mortgage insurance, even if your combined LTV is above 80% in some cases (though lenders with higher CLTV limits may compensate with higher rates).