The people's voice of reason
The people's voice of reason
Becoming a homeowner is a major milestone, and the benefits don't end when you cross the threshold. Under the right circumstances, you can use your home as a tool to reach other financial goals. In fact, once you crunch the numbers, you might find that turning your home equity into spendable cash is the smartest of all your borrowing options.
A home equity line of credit,known as a HELOC, is one way to consolidate high-interest debts or cover a large expense. Achieve takes a look at what it is, how to get one, and how it works once you're approved.
Key takeaways:
A HELOC is a line of credit secured by your home. It’s a way to borrow against your home equity. You receive a credit limit and can borrow as needed during the draw period, then repay the balance, typically in monthly installments, during the repayment period.
Secured loans are guaranteed by something valuable—in this case, your home. That's an advantage because home loans tend to have lower interest rates than other kinds of loans. Just know that with any secured loan, if you don't repay it, you could lose the thing you used as a guarantee—in this case, your home.
You can think of a HELOC as being like a credit card. You can borrow against your approved limit, make payments toward the balance, and borrow again during the draw period.
What you can use a HELOC for is completely up to you—a home equity line of credit is a flexible way to borrow. Some of the most common uses for a HELOC include:
A HELOC’s draw period is the initial phase—usually lasting five to 10 years—when you can borrow, repay, and borrow again as often as you like, up to the maximum credit line.
HELOC draw period example:
Let’s say you get a HELOC with a $100,000 limit, and you borrow the full amount when your loan closes. You pay the balance down to $70,000 and you’re still in your draw period. If you want to, you can borrow another $30,000.
When it comes to spending the money, lenders usually offer borrowers a few options:
If you get a HELOC from a bank or credit union with a branch near you, you might also be able to withdraw cash in person.
HELOC payments could fluctuate during the draw period if the balance goes up and down.
Some HELOC lenders allow you to make interest-only payments during the draw period. You would pay only the interest on what you've borrowed, but nothing toward the principal. That means two things:
Once your draw period ends and your repayment period begins, your monthly payment will be set to an amount that will fully pay off your loan by the end of the loan term.
Some lenders require a principal plus interest payment from the time your loan closes. In that case, the payment amount will always be based on your balance and loan term. There won’t be payment shock the day your draw period ends
Regular payments cover both interest and principal, with the proportion of each shifting over time. In the early days, more of the payment goes toward interest, but as the loan term progresses, a larger portion is applied to the principal. The advantage of a fully amortized loan is that you don’t have a lump sum due at the end of the repayment term.
The repayment period begins after the draw period ends. You can’t borrow more, and you’ll start repaying both the principal and interest in monthly installments. Depending on your lender and loan terms, this phase typically lasts five to 30 years.
A longer repayment period could get you a lower monthly payment, and a shorter repayment period helps you minimize the amount of interest you’ll pay.
Your monthly payment amount depends on a few factors, including:
One of the questions most people ask about home equity loans is how much you can borrow.
The answer depends on:
Home equity is the difference between your home's market value and the amount you still owe on your mortgage, if you have one. If your home is currently worth $200,000 and your mortgage balance is $110,000, you have $90,000 in equity.
Lenders typically limit the amount of mortgage debt you can have against one property. A HELOC is typically a second mortgage. (It could be a primary mortgage if you don't already have a mortgage on the home.) The loan limit includes the amount you owe on your mortgage plus the new HELOC that you want. Here's what it might look like.
Let's say your home's current market value is $400,000 and you owe $170,000 on your mortgage.
How to calculate your equity
400,000 - 170,000 = 230,000
You have $230,000 in equity.
How to calculate your loan-to-value ratio
That’s the amount you owe, compared to the home’s value.
170,000 / 400,000 = 0.425
Multiply the answer by 100 to get a percentage. Your LTV is 42.5%.
Find out the lender’s CLTV limit and loan limit
HELOC lenders limit how much total mortgage debt you can owe on your home. The combined loan-to-value ratio is the amount you will owe once you get the new loan, compared to the home’s value.
If the lender’s CLTV limit is 80%, you can’t owe more than $320,000 on this home. That gives you some room to borrow with a HELOC. You could apply for a $150,000 HELOC and still be under the lender’s limit.
The lender’s loan limit is simply the most they will lend any borrower.
Last, review your credit, income and debts
Factors that could affect your HELOC amount include your credit profile and your debt-to-income (DTI) ratio. DTI is how much of your income you spend on debt and housing each month. The lender will want to be sure you have room in your budget for a new loan payment.
You can get an idea of your home’s value by looking at real estate websites, but when it comes time to review your loan application, expect your lender to do their own appraisal. For HELOCs, many lenders find out the value of your home by using technology, not an in-person appraiser who visits your home. The technology is called automated valuation software.
The interest rate on a HELOC is often lower than the rate you would pay to borrow with a credit card or a personal loan. That's because a HELOC is a secured loan, which lowers the risk for the lender.
Here are the three types of interest offered by HELOC lenders.
The last variety to mention is the similarly named home equity loan, which gives you a lump sum of cash upfront instead of access to a credit line. Home equity loans usually have a fixed interest rate, but borrowing is less flexible compared to a HELOC. You have to take the full amount of the loan when the loan is funded, and you can't decide to borrow more later without applying for a whole new loan.
Pro tip: Interest paid on a home equity line of credit might be tax-deductible if you use the money for improvements or repairs to your home. Starting in tax year 2026, the interest may be tax-deductible no matter how you use the loan. Check with a tax professional.
Yes, you can pay off a HELOC early. The caveat is that some lenders charge a prepayment penalty. That’s a fee for paying off the loan ahead of schedule. Paying a HELOC early could be a good idea if you can afford it, because the faster you pay off a loan, the less interest you’ll pay.
Whether or not to take out a HELOC is a big decision, one with both pros and cons.
Pros
Cons
A HELOC can be an excellent idea for a borrower who has a clear idea of how the money will be used. For example, if you're considering a HELOC to rid yourself of high-interest debt, doing so could save you thousands of dollars in interest payments. If your home is in serious need of repairs and upgrades, each of those projects could improve your quality of life and possibly your home’s value.
Ultimately, you must decide if the reason you're borrowing the money outweighs the potential risk. Asking yourself the following questions can help you make a solid decision:
What is the difference between a HELOC and a home equity loan?
A HELOC is a revolving line of credit that you can borrow against for the first few years of the loan. You can borrow, repay, and borrow more as often as you like, up to your credit limit. You only pay interest on the amount you borrow. Once the draw period ends, you enter a repayment phase. You’ll make regular monthly payments in an amount that will pay off the loan entirely by the end of the loan term.
A home equity loan is a one-time lump sum loan. You immediately begin paying it off in monthly installments. Once you get your loan, you can’t borrow more.
How is a HELOC different from a credit card?
The majority of credit cards are unsecured. That means you qualify based on your credit standing, not whether you own something valuable that can serve as a guarantee. If you don’t repay the debt, the lender could sue you.
A HELOC is guaranteed by your home. If you don’t repay the loan, you could lose your home.
Can I lose my house with a HELOC?
Yes, but it's never a lender's first choice to repossess and sell your property. If you have trouble making a HELOC payment, immediately contact your lender to ask about options, like loan deferment, refinancing, or a reduced interest rate.
This story was produced by Achieve and reviewed and distributed by Stacker.
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