Michelle is a licensed real estate broker-owner and COO of a global investment firm that specializes in infrastructure financing. Her expertise is featured throughout Fit Small Business’s real estate investing, property management, and rental property content.
Home Equity Line Of Credit (HELOC) is a revolving line of credit collateralized by your home. The maximum limit for a HELOC is based on the amount of equity in your home and typically will not exceed 85% of the home’s value. HELOCs have relatively low interest rates, with current rates starting at 5.25%.
The low rates of a HELOC make an equity line an ideal financing option for debt consolidation, affordable for home improvements and renovations, or for covering college expenses. If you’re shopping for a HELOC, people often search for this type of information about this subject, it would be better to discuss it via podcast. If you want more exposure, make sure to buy soundcloud plays for a higher success rate.
How a Home Equity Line of Credit Works
A home equity line of credit is a credit line that allows you to borrow up to 85% of the value of your home. Using a HELOC, you have a 10-year draw period with interest-only payments. In the repayment period, typically 20 years, your payments could increase to include principal and interest.
HELOCS commonly are used to consolidate high-interest credit cards because they offer lower rates, tied to the prime rate. In addition, because there are no restrictions as to how funds are used, you can finance home additions, businesses, or keep it as an emergency fund. You only pay on what you borrow, and payments are often interest-only during the draw period.
When you get a HELOC, the bank will place a second lien on your property. Underwriting guidelines will typically require that you have more than 15% to 20% equity. Banks will also document your income to ensure you qualify for a payment that assumes the entire available credit line is used. For more information on borrowing against a HELOC and repaying your loan, be sure to check out the five steps outlined below.
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Who a Home Equity Line of Credit Is Right For
A HELOC is good for homeowners with documented income, credit scores above 620, and existing equity in their home. Home equity lines of credit are also ideal for borrowers who want an available source of funds that they can borrow against and repay on their own schedule. HELOCs have the flexibility to be used for many purposes.
Some common uses of a home equity line of credit include:
- Pay off high-interest debt: Most equity lines offer very competitive rates because the loan is collateralized by your house, whereas a credit card is unsecured. Where credit cards can charge more than 20%, HELOCs typically cost less than 10% annually.
- Upgrade or expand your home: If your house needs an addition or renovations, using a HELOC allows you to increase the value and enjoyment of your home.
- Use as an emergency fund: Keep the line of credit as an emergency fund.
- Pay for college tuition: A HELOC often is used to pay college tuition at the beginning of the semester. It’s then paid back throughout the semester, so the line is available again for future tuition cost.
While a home equity line of credit offers flexible terms and low interest rates, it does carry risk for the homeowner. Unlike an unsecured credit card, a HELOC is secured by your home, meaning there is a lien on your deed. If you don’t pay the HELOC payments, your homeownership could be at risk.
Home Equity Line of Credit Providers
Home equity lines of credit are provided by large commercial banks, local community banks, and brokers. Depending on the type of provider you choose, you may be able to get higher loan-to-value (LTV) ratios, lower upfront and annual fees, and no closing costs. When choosing providers, it’s best to look for national companies that specialize in HELOCs.
Top Home Equity Line of Credit Providers
|Wells Fargo||Homeowners who want a large national bank and to have an option to convert their balance to a fixed rate.|
|U.S. Bank||Homeowners who want to borrow smaller sums for minor improvements.|
|LendingTree||Homeowners who want multiple lenders competing for their loan.|
|Bank of America||Homeowners who prefer a large national bank with no application fees or annual fees.|
|Chase||Homeowners who have a banking relationship with Chase and may qualify for relationship rate discounts.|
When choosing your provider, be sure to consider not only interest rates, but also rate caps, repayment schedules, and relationship discounts. Because most HELOCs have variable rates tied to the prime rate, your payments will fluctuate. At some point, you may want a fixed rate on your balance, so be sure that it’s available.
A few of the top home equity line of credit providers include Wells Fargo, U.S. Bank, LendingTree, Bank of America, and Chase.
Wells Fargo is a large commercial bank that has 8,000 branches and offers home equity lines of credit, home equity loans, and home mortgages. Founded in 1852, it is known for its full-service retail banking and lending, insurance, and investments. It is headquartered in San Francisco, California.
Wells Fargo’s HELOC is good if you want to work with a large bank with an easy online application. It offers an optional fixed-rate component and a loan minimum of $25,000. Wells Fargo doesn’t charge closing costs but has a $75 annual fee and early repayment fee of $500. If you’re a bank customer, you may also qualify for relationship discounts.
U.S. Bank is a national bank with more than 3,100 branches that offers a full suite of banking products, including retail banking, insurance, and investment products. It was founded in 1968 and is headquartered in Minneapolis, Minnesota.
U.S. Bank is good for those looking for a small line of credit of $15,000, but it also goes up to $750,000. They don’t charge closing fees, but you can expect a $90 a year annual fee. Although its HELOC has a variable rate, it does offer a fixed rate conversion and discounts for customers who set up automatic drafts.
LendingTree was founded in 1998 and is headquartered in Charlotte, North Carolina. It is not a direct lender but instead functions as a marketplace that connects consumers with multiple lenders, banks, and credit partners who compete for your business.
LendingTree is a good option for those who don’t already have an established relationship with a financial institution. Using LendingTree, you can find several loan options to choose from and have lenders competing for your business.
Bank of America
Bank of America is one of the largest banks in the United States and has more than 4,600 branches. It was founded in 1998 and focuses on investment banking and financial services. Bank of America is headquartered in Charlotte, North Carolina.
Bank of America is a good option if you already have a banking relationship with it or if you don’t want to pay an annual fee for your home equity line of credit. Bank of America HELOCs don’t have any application fees, annual fees, or closing costs, but it does charge an early closure fee if you close your HELOC account within three years of opening it.
Chase Bank is another large commercial bank and has more than 5,100 branches in the United States. Chase is a storied institution that traces its roots back to 1799. Chase Bank is headquartered in New York, New York.
Chase is a good option if you are already a Chase customer or want to become one. It offers pricing discounts up to .62% off the standard variable rate for qualifying customers. However, it does charge an origination fee of $50 and an annual fee of $50 for its HELOCs.
Understanding your current financial picture will help you choose the best lender for your needs. Your credit score, monthly debt-to-income, and current home value will influence your HELOC rates and terms. It’s also good to know upfront your intended use, how you plan to repay, and what form of access you prefer.
How to Get a Home Equity Line of Credit in 5 Steps
To qualify for and use a HELOC effectively, you have to follow certain steps. These steps include assessing your own finances, choosing the right provider, and gathering the documents necessary for HELOC underwriting. Before you can qualify for a HELOC, it’s important to understand these steps.
1. Assess Your Current Financial Needs for a HELOC
When deciding if a home equity line of credit is right for you, it’s important first to assess your financial situation and intent for the HELOC. Decide what credit cards you may pay off with your HELOC or how much the home addition will cost that you intend to pay for with your HELOC. Also, make sure that adding a HELOC payment will fit into your monthly budget.
Information you’ll need to know about your financial situation includes:
- Home value: Sites like Zillow or Realtor.com will give you an estimated home value.
- Credit score: Most lenders will require a 640 minimum with the best rates going to those with scores of 730 or more.
- Income: Collect one month of pay stubs for each borrower, and if you’re self-employed, tax returns for the previous two years to document income.
- First mortgage balance: To know how much equity you have, you’ll need a recent mortgage statement. Current value minus current mortgage equals your available equity.
Knowing this information ahead of time will help you choose the right HELOC lender. In addition, the above items can affect your interest rate, closing cost, and relationship discounts.
2. Choose Your Home Equity Line of Credit Provider
When looking for a HELOC provider, start by considering banks with whom you have existing relationships. You can also go to a marketplace like LendingTree to quickly gather quotes from multiple lenders. Once you know your current financial situation, you will be able to speak confidently with providers. Some offer HELOCs with no annual fees, and some offer special rates for current customers.
Some questions to ask a potential home equity line of credit provider include:
- Is there an online application available?
- How long is the draw period?
- Is there an initial draw requirement?
- Is there an annual fee?
- How long is the payback period?
- Is there a minimum draw at closing?
- How is the interest rate calculated, and is there a maximum rate cap?
- Do you require an appraisal?
- What is your max combined LTV (CLTV)?
- Do you offer discounts to existing clients?
It can be a lot of work to get answers to all those questions from multiple lenders if you’re approaching them one at a time. Instead, you can visit an online marketplace, like LendingTree, and review offers from multiple lenders at once. That can save you time and help you quickly find a HELOC that fits.
3. Qualifying for a HELOC
Underwriting for HELOC providers requires all borrowers to complete an application. The lender will process the application, collect credit scores, review income documents, and order an assessment of the property value. Underwriting for a HELOC typically takes about 45 days.
Homeowners with credit scores above 720, equity below 80%, and with documented income typically qualify for the best rates and terms. However, some things could negatively affect approval.
Some things that can prevent you from qualifying for a HELOC include:
- Your debt-to-income is too high; typically banks like 45% or lower
- You owe too much on your first mortgage, so there is not enough available equity
- Your credit score is too low, typically less than 660
When shopping for a home equity line of credit provider, ask them upfront what their qualification requirements include. Some lenders will allow borrowers to have less than perfect credit but will expect a higher interest rate.
4. Draw Period Against Your Home Equity Line of Credit
HELOCS allow you to draw against your home equity line of credit during a 10-year draw period, thereby allowing you to borrow, pay it back, and borrow again. Your bank will require monthly interest-only payments on your outstanding balance. These payments will vary, increasing or decreasing with the fluctuations in the prime rate.
Some of the ways you can access your home equity line of credit include:
- Internal bank transfer from the HELOC to your checking account
- Home equity line of credit checkbook
- Home equity line of credit Visa access card
- Go into your provider’s financial center
Some banks also offer borrowers an option to choose between an interest-only draw period or a principal and interest draw period. The principal and interest draw period will require monthly payments similar to those on a term loan. This keeps you used to a higher payment as opposed to an interest-only payment.
5. Payback Period for Your HELOC
HELOCs allow interest-only monthly payments during your draw period. Most lenders allow for interest-only monthly payments and principal reduction payments with no prepayment penalty. HELOCs typically have a draw period of 10 years.
At the end of your 10-year draw period, your repayment period will begin, and your lender will require you to start paying back principal. The open line of credit then converts to a fully amortized term loan. The interest rate will be fixed for the remainder of the loan term. This will allow you to make fixed monthly principal and interest payments.
If you want to keep the equity line open, you may have an option to renew the current line of credit as is or have an option to start a new HELOC with a larger line amount and a new 10-year draw period. Some banks require a new appraisal and updated underwriting while others review your line and, if it was previously being used properly, approve a renewal of the existing line.
Home Equity Line of Credit Costs
Most HELOC providers offer little to no closing costs. If a lender does charge, it is for an application fee and appraisal, which can cost the borrower up to $500. Many HELOCs have annual fees up to $100; some banks will waive this fee and discount interest rates for existing preferred customers.
That being said, some lenders do charge origination fees, annual fees, and early closing fees.
Some typical home equity line of credit costs include:
- Application fee ($50 to $250): This is the fee you pay for the lender reviewing your application.
- Appraisal fee ($0 to $450): Some lenders do in-house assessments or “drive-by appraisals” based on tax records, but others require a full appraisal.
- Closing costs (up to $1,000): Some lenders will pay all of the borrower’s closing fees, and others will pay a portion or none. Expect to pay an attorney, title agent, or escrow agent fee for handling the settlement or loan closing.
- Annual fee (up to $100): Some providers charge an annual fee for their HELOC.
- Prepayment fee (up to $500): Most lenders want you to hold on to your line of credit long term and will charge a fee for closing early, typically in less than three years.
Generally, borrowers can expect to pay $1,000 to $2,500 in upfront costs for a HELOC and interest rates of 6% to 9.5% annually. Also, be prepared to pay home insurance and property taxes if they are due currently.
Home Equity Line of Credit Rates
Home equity line of credit interest rates start with a variable rate of prime rate―the index―as published in The Wall Street Journal, plus a margin (1% to 3%). If the prime rate increases, so does the annual percentage rate (APR) on the HELOC. Rates are determined based on your credit rating, debt-to-income, and LTV ratio.
Many home equity line of credit providers have ways to help borrowers pay down their equity lines by offering them fixed rates for either part or the entire equity line balance. This is a good option if you have a large purchase like a wedding and do not have a source of repayment like a tax refund or bonus.
HELOC Interest Tax Deduction
Under the new Tax Cuts and Jobs Act of 2017, borrowers can deduct the interest paid on HELOCs if they use the funds to buy, build, or improve the taxpayer’s primary or secondary home. If you use the funds from your equity line to purchase other items, no matter when you incurred the debt, the interest is not tax-deductible.
The new law imposes lower dollar limits on qualifying mortgage interest. Taxpayers can deduct interest on $750,000 of combined qualifying residential loans. For those who incurred their mortgage debt before December 16, 2017, you are still allowed the higher mortgage interest deduction up to $1 million.
For example, if you’re using your equity line to pay off or consolidate high-interest rate credit cards, the interest is likely not deductible. However, if you use the line to add more square footage to your home, the interest is typically tax-deductible. If you have questions, it’s always best to check with your tax professional. To learn more, be sure to check out our guide to deducting HELOC interest.
Pros & Cons of a Home Equity Line of Credit
A home equity line of credit offers borrowers lots of flexibility with low payment options and low closing costs. However, unlike an unsecured credit card, it is a second mortgage; if consecutive payments are missed, you risk losing the house, and if the home value decreases, you could end up owing more on your home than it’s worth.
Pros of a HELOC
HELOCS are a way to consolidate debt, make large renovations to your home, or pay for college. If you own a home and have equity, a HELOC may be a good way for you to tap into your equity. In addition, HELOCs have tax benefits that allow you to access funds without having taxable income.
Pros of a home equity line of credit include:
- Low closing costs
- Revolving line of credit
- Interest-only payment option
- No restrictions on the use of funds
- Possible tax deduction of interest
Cons of a HELOC
Although HELOCS offer great flexibility, they should be considered carefully. These lines of credit are tied to your home’s equity, so if you run into financial trouble and miss payments, the bank can foreclose on the property, similar to a first mortgage lien holder.
Cons of a home equity line of credit include:
- Some closing costs
- Limited draw period
- Have to use your house as collateral
- Variable rate
- Easy to overextend
Given the pros and cons of a home equity line of credit, there are lots of things to consider. While a home equity line of credit has many benefits, it’s not right for everyone. You may not be in a position where you have enough equity, may not feel comfortable with a variable rate, or prefer not to put a second mortgage on your home.
HELOC for Real Estate Investing
Home equity lines of credit can be used to fund down payments for purchasing investment property. They can also be a good source for the renovation cost of investment properties. A borrower can utilize an investment line of credit to fund short-term costs in a fix and flip and pay it off once the property sells.
If a HELOC isn’t the best fit for you, there are alternatives to funding real estate investments. If you have equity in a property but don’t want the risk of a variable rate, you can refinance your house with a fixed rate and term and take cash out for investing. Another option is to use a home improvement credit card to fund some or all of your renovation cost.
Some other alternatives to a home equity line of credit include:
- Home equity loan
- Credit card
- Personal loan
- Hard money loan
- Cash-out refinance
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HELOC Frequently Asked Questions (FAQs)
This guide explains what a home equity line of credit is and discusses how and when it may be used. These are some FAQs we’ve encountered and answers that might give you further insights.
1. How Do I Get the Best Rate on a HELOC?
Getting the best rate on your HELOC can make a significant difference in your payment and annual interest paid. Lenders tend to give borrowers with credit scores above 720 the best rates. Having a conservative LTV ratio under 80% can also help borrowers get a better rate. Shop different lenders for the best rates and terms.
2. How Much Is Owed on Home Equity Loans in the US?
Home equity lines of credit are a smart choice for borrowers looking for short-term money. In the US, HELOCs account for approximately $347,769 billion in loans currently. Although the trend for equity lines has decreased some, with comparably low cost and fast funding times, these loans remain popular even as rates rise.
3. What Does a HELOC Rate Cap Mean?
HELOCs typically have two different rate caps. Because most HELOCs have variable rates, banks offer their clients peace of mind with a rate cap. The annual cap means the annual rate will not rise more than the cap, say 2% per year. Banks also have caps on the highest your annual rate can ever be, say 7%, from the time you open your HELOC.
Should I Use My HELOC to Fix & Flip a House?
HELOCs are a resource for short-term money. You can borrow and pay back many times during the draw period. Investors like HELOCs flexibility in that regard. However, you’re putting a second lien on your home; if you don’t pay the payment, your home could be at risk.
A HELOC can be a resource for homeowners with equity to fund large purchases and consolidate high-interest debt. It is a revolving line of credit with no use restrictions, but you are using your house as collateral. Look at your financial picture and choose the right lender based on your goals.
If you’re shopping for a home equity line of credit, you can reach out to one lender at a time, hoping you find a good deal. You can also visit an online marketplace, like LendingTree, and review offers from multiple lenders at once. Save time, shop smart, and find a HELOC that fits.