What Is a HELOC?
A Home Equity Line of Credit (HELOC) is a type of revolving credit that allows homeowners to borrow against the equity in their home. Unlike a traditional loan, where the borrower receives a lump sum upfront, a HELOC provides access to a line of credit with a predetermined limit. Borrowers can withdraw funds from the line of credit as needed during a specified draw period, typically up to 10 years. HELOCs typically have variable interest rates, which can fluctuate based on changes in market rates.
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How do HELOCs Work?
A Home Equity Line of Credit (HELOC) works by allowing homeowners to borrow against the equity they have built up in their home. It operates as a revolving line of credit, similar to a credit card. Homeowners are given a maximum borrowing limit based on the equity in their home and other factors. During a specified draw period, typically up to 10 years, borrowers can access funds from the HELOC as needed, up to the approved limit. They can withdraw funds using checks, a debit card, or online transfers. Interest is only charged on the amount borrowed, and payments during the draw period may be interest-only.
After the draw period ends, the HELOC enters a repayment period, during which borrowers must repay the outstanding balance, typically over a period of 10 to 20 years. HELOCs often have variable interest rates, meaning the interest rate can fluctuate based on market conditions.
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When Should You Take a HELOC?
A Home Equity Line of Credit (HELOC) offers several benefits that may make it a suitable option for homeowners:
HELOCs provide flexibility, allowing borrowers to access funds as needed up to a predetermined limit. This flexibility is ideal for covering ongoing expenses or projects with varying costs. Homeowners often use HELOCs to finance home renovations or improvements. Investing in home upgrades can potentially increase the property’s value, making a HELOC a strategic choice for funding such projects.
Consolidating high-interest debt, like credit card balances or personal loans, into a HELOC can streamline debt repayment and potentially save money on interest. HELOCs can also be used to fund education expenses or other major purchases, providing borrowers with a flexible financing option.
Due to typically lower interest rates compared to other forms of borrowing, such as credit cards, HELOCs can help borrowers save on interest payments over time. However, it’s crucial to carefully assess individual financial circumstances and risks associated with HELOCs before proceeding. Seeking advice from a financial advisor can provide tailored insights and guidance.
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Pros and Cons of HELOCs
Pros of Getting a HELOC:
- Flexibility: HELOCs offer easy access to funds as needed.
- Lower Interest Rates: Typically, HELOCs have lower rates compared to credit cards.
- Potential Tax Deductions: Interest may be tax-deductible for home improvements.
- Revolving Credit: Allows borrowers to repay and redraw funds during the draw period.
Cons of Getting a HELOC:
- Risk of Foreclosure: Failure to repay could lead to losing the home.
- Variable Interest Rates: Rates can fluctuate, leading to unpredictable payments.
- Fees and Closing Costs: HELOCs often come with various fees.
- Potential Over-Borrowing: Temptation to borrow more than needed.
- End of Draw Period: Monthly payments may increase significantly after the draw period ends.
Before obtaining a HELOC, borrowers should carefully weigh the pros and cons, assess their financial situation, and consider alternative financing options. Consulting with a financial advisor can provide personalized guidance and help borrowers make informed decisions.
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FAQ
What can I use a HELOC for?
HELOC funds can be used for various purposes, including home renovations, debt consolidation, education expenses, emergency expenses, or investment opportunities. However, it’s essential to use the funds responsibly and for purposes that contribute to your financial well-being.
How much can I borrow with a HELOC?
The amount you can borrow with a HELOC depends on factors such as the amount of equity you have in your home, your creditworthiness, income, and the lender’s policies. Most lenders allow borrowers to access up to 80-85% of their home’s equity.
What are the repayment terms for a HELOC?
During the draw period, borrowers typically make interest-only payments on the amount borrowed. After the draw period ends, the HELOC enters a repayment period where borrowers must repay the outstanding balance, often over a period of 10 to 20 years.
What are the fees associated with HELOCs?
HELOCs may come with fees such as application fees, appraisal fees, closing costs, annual fees, transaction fees, and early termination fees. It’s essential to carefully review the fee structure of a HELOC before applying.
What are the risks of getting a HELOC?
One of the primary risks of a HELOC is the potential loss of your home if you fail to repay the loan according to the terms. Additionally, HELOCs often have variable interest rates, which can lead to unpredictable payments, and may come with various fees and closing costs.
Disclosures:
Better Mortgage Disclaimer
¹One Day HELOC offers customers who provide required financial documentation within 4 hours of rate lock the opportunity to receive an underwriting determination (additional requirements may apply) within 24 hours of rate lock. Initial approval does not guarantee final underwriting approval. See One Day HELOC Terms and Conditions.
Assumes borrowers are eligible for the Automated Valuation Model (AVM) to calculate their home value, their loan amount is less than $400,000, all required documents are uploaded to their Better Mortgage online account within 24 hours of application, closing is scheduled for the earliest available date and time, and a notary is readily available. Funding timelines may vary and may be longer if an appraisal is required to calculate a borrower’s home value.
Figure disclosure
¹Approval may be granted in five minutes but is ultimately subject to verification of income and employment, as well as verification that your property is in at least average condition with a property condition report. Five business day funding timeline assumes closing the loan with our remote online notary, and where loan amounts are under $400,000 which would not require an appraisal. 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, or that require a waiting period prior to closing, or where loan amounts exceed $400,000.
²Our loan amounts range from a minimum of $15,000 to a maximum of $750,000. For properties located in AK, the minimum loan amount is $25,001 and for properties located in TX, the minimum loan amount is $35,000.
Your maximum loan amount may be lower than $750,000, and will ultimately depend on your home value, lien position, credit profile, verified income amount, and equity available at the time of application. We determine home value and resulting equity through independent data sources and automated valuation models or appraisal. Loan amounts above $400,000 are subject to appraisal.
*Available APRs range from 6.35% – 14.9%, which includes the payment of a higher origination fee in exchange for a reduced interest rate, which is not available to all applicants or in all states. The lowest APRs are only available to the most qualified applicants, depending on credit profile and the state where the property is located, and those who also select five year loan terms; APRs will be higher for other applicants and those who select longer loan terms. Your actual rate will depend on many factors such as your credit, combined loan-to-value ratio, loan term, occupancy status, and whether you are eligible for and choose to pay a higher origination fee in exchange for a lower rate. Rates change frequently so your exact APR will depend on the date you apply. APRs for home equity lines of credit do not include costs other than interest. You will be responsible for an origination fee of up to 4.99% of your initial draw, depending on the state in which your property is located and your credit profile. You may also be responsible for paying the costs of valuation if an AVM is not available for your property ($180), or an appraisal if your loan amount exceeds $400,000 ($500-$2,000, depending on property type, property value, and state), manual notarization if your county doesn’t permit eNotary ($350), and recording fees ($0 – $315) and recording taxes, which vary by state and county ($0-$1,400 per one hundred thousand dollars borrowed). Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone.
Upstart Mortgage Disclaimer
Terms shown here are subject to change without notice. APRs for initial advances range from 6.52% to 18.00% based on rates offered as of July 2025. The lowest rate is only available to consumers willing to become a member of a credit union and to those who meet a minimum FICO score of 780, CLTV under 70%, and DTI under 45%. Your actual rate will depend on many factors such as your credit history, combined loan-to-value ratio (CLTV), line amount, loan term, lien position, and property state. Origination fee to open an account is between 0% and 4.99% of the approved credit limit. The Annual Percentage Rate (“APR”) is variable and based on the Prime Rate as published in the Wall Street Journal “Money Rates” table plus or minus a margin. Your APR will never be less than 3.99% or greater than 18.00%. Property insurance is required.