How to Get a Home Equity Line of Credit (HELOC)

A HELOC functions much like a credit card. During your draw period, you can borrow funds up to a set limit and make minimum monthly payments to cover interest accrued on your balance. Your draw period will vary depending on the lender, but most lenders allow you to draw funds for 10 years. Once your draw period is over, you will enter a repayment period, which typically lasts 20 years. During the repayment period, you are making principal and interest payments on the total balance you borrowed until it is repaid. Unlike most loans that have a fixed interest rate, HELOCs have a variable interest rate. This means your interest rate and your monthly payments will fluctuate over time. HELOCs and home equity loans typically include closing costs as well, which are administrative fees associated with processing your loan. 

Home equity loans also allow you to borrow against your home’s equity. However, instead of having a multi-year draw period, you receive a single lump sum payment. As with a HELOC, you will repay the borrowed funds over a set period, which usually ranges from 5 to 30 years. The key benefit of a home equity loan is that the interest rate is fixed, meaning you will have predictable monthly payments.  

Loan amounts are determined based on the amount of equity you have in your home. Usually, lenders require you to stay below a loan-to-value ratio of 80%, although some will allow you to borrow up to the 90% LTV threshold. These same rules apply to HELOC loans. 

Loan-to-value refers to how much money you owe on your home as it relates to what it is worth. For instance, let’s say your home is worth $300,000 and you owe $210,000. In this scenario, your LTV would be 70% and you could borrow 10–20% of your home’s value (depending on the lender) using a HELOC or home equity loan. If you borrowed $30,000, the combined LTV of your mortgage and loan would be 80%. 

Most HELOC lenders follow a few standard guidelines when evaluating whether someone qualifies for a home equity loan or line of credit. For instance, you will need a credit score in the mid-600s or higher, a relatively low debt-to-income ratio, a good repayment history, and a minimum percentage of equity in your home. 

In most instances, the loan to value requirement for a HELOC is an LTV of under 80%. However, an LTV of 70% or less would be ideal, as this means you could borrow at least 10% of your home’s equity. 

There are two key advantages associated with a HELOC: 

• Flexibility: If you are a disciplined borrower, the flexibility of a HELOC can be a huge advantage. You can tap into funds precisely when you need them without navigating another loan process. Once your HELOC is approved and you enter the draw period, you can access funds on demand to cover expenses, consolidate debt, and more. 
• An extended draw period: The long draw period is another huge benefit. For instance, let’s say that you want to renovate your home and use a HELOC to fund your endeavor. If you initially borrow $10,000 and go over budget, you can easily obtain additional funds if you are still below your loan limit and within the draw period. 

Some notable risks with a HELOC are: 

• Variable interest rate: While rates may be low when you take out your home equity line of credit, they can change over time. As a result, your monthly payment will also change. If you borrowed a large sum and your interest rate fluctuates by several percentage points, it could affect your monthly payment by a few hundred dollars. 
• Ease with which you can borrow funds: Undisciplined spending habits could cause you to rack up additional debt and place you in a financial bind. Therefore, make sure to have a clear plan in place before tapping into your home’s equity.