Borrowing against your home’s value can be one way to access cash for big expenses, like renovations or debt consolidation. One option some homeowners consider is a home equity line of credit, or HELOC. This type of loan gives you flexible access to funds based on the equity you’ve built up in your home.
But before you apply, it’s important to understand how a HELOC works, who qualifies, and what risks may come with it. Here’s what to know.
What Is a HELOC?
A home equity line of credit, or HELOC, is a type of loan that lets you borrow money using the equity in your home. It works more like a credit card than a traditional loan. Instead of getting all the money upfront, you can borrow what you need, when you need it, up to a set limit.
This type of loan may appeal to homeowners who want flexibility. It can be used for things like home improvements, large expenses, or managing debt. But since your home is used as collateral, missing payments could put it at risk.
How It Works
HELOCs have two main phases:
- Draw period: This is when you can take money out, usually for 5 to 10 years. During this time, many lenders only require you to pay the interest, not the loan balance.
- Repayment period: After the draw period ends, you’ll start repaying both the amount you borrowed and the interest. This phase typically lasts 10 to 20 years, and your payments will likely increase.
Key Features of HELOCs
Understanding the main features of a HELOC can help you decide whether it fits your needs.
Borrowing Limit
Your credit limit is based on your home equity—generally the value of your home minus what you still owe on your mortgage. Lenders often allow you to borrow up to 85% of your equity, though exact limits vary.
Flexible Access to Funds
One of the biggest draws of a HELOC is flexibility. You don’t have to borrow the full amount at once. Instead, you can take out money as you need it, which may help you avoid unnecessary interest charges.
Variable Interest Rates
Most HELOCs have variable interest rates. That means your rate—and your monthly payment—can change over time, depending on market conditions. Some lenders may offer an introductory fixed rate for a limited time.
Repayment Terms
During the draw period, payments may be interest-only. But once repayment begins, you’ll start paying down the principal too. This shift can lead to higher monthly payments, so it’s important to plan ahead.
Who Qualifies for a HELOC?
Lenders look at a few key factors to decide whether you qualify for a HELOC. While requirements vary, most focus on your home equity, credit score, income, and debt.
Home Equity
You’ll need to have built up enough equity in your home—usually at least 15% to 20%. Lenders often use your home’s current appraised value and subtract your mortgage balance to calculate how much you can borrow.
Credit Score
According to Experian, most lenders require a FICO® Score of at least 680 to qualify for a home equity loan. Some may consider scores as low as 620 if other financial factors, like income and home equity, are strong.
Income and Debt
Lenders want to make sure you can afford new payments. They’ll likely ask for proof of income and check your debt-to-income ratio, which compares your monthly debt payments to your income. A lower ratio means you may have more room in your budget for a new loan.
Alternatives to HELOCs
A HELOC isn’t the only way to borrow against your home’s value. Depending on your situation, one of these options might be a better fit.
Home Equity Loan
This type of loan gives you a lump sum upfront, which you repay in fixed monthly amounts. It may work well if you know exactly how much you need and prefer predictable payments.
Cash-Out Refinance
With a cash-out refinance, you replace your current mortgage with a new, larger one—and take the difference in cash. It can be an option if you’re already considering refinancing and want to borrow more at the same time.
Personal Loan
If you don’t want to use your home as collateral, a personal loan might be worth exploring. These loans are typically unsecured, meaning your home isn’t at risk, but they may come with higher interest rates than secured options.
Things to Do Before Applying
If you’re thinking about a HELOC or another home equity product, it helps to be prepared. Here are a few smart steps to take ahead of time.
Review Your Budget
Make sure you can handle the monthly payments—not just during the interest-only period, but also later when full repayment kicks in. Think about how a change in income or expenses could affect your ability to pay.
Check Your Credit Reports
Look over your credit reports for accuracy. You can get free weekly reports from the three major credit bureaus at AnnualCreditReport.com. Fixing errors or paying down balances could improve your credit standing before you apply.
Understand Your Equity
Get a rough idea of your home’s value and subtract what you still owe on your mortgage. That’s your home equity. The more equity you have, the more you may be eligible to borrow—though the exact amount depends on your lender’s rules.
Final Thoughts
A home equity line of credit can offer flexible access to funds for homeowners who have built up equity in their property. But like any loan, it comes with responsibilities and risks. Variable rates, changing payments, and the fact that your home is used as collateral all make it important to think carefully before borrowing.
Take time to review your budget, credit, and overall financial picture. If a HELOC feels like too much of a stretch, there may be other borrowing options worth exploring. And if you’re unsure about what’s right for you, consider speaking with a trusted financial professional.
