Home Equity Line of Credit (HELOC) Guide: Rates, Costs & How It Works
A home equity line of credit (HELOC) is a revolving line of credit that lets you borrow against your home's equity. You get approved for a credit limit, then borrow only what you need during a 10-year draw period. You pay interest only on the amount you use, making it cheaper than credit cards or personal loans.
HELOCs offer some of the lowest interest rates available. The average HELOC rate ranges from 6.250% to 11.000% APR and will not exceed 18% APR, making it cheaper than credit cards, personal loans, and even some home equity loans.
Your home serves as collateral, which means lower rates but also real risk. If you can't make payments, you could lose your house.
What is a HELOC?
A HELOC loan works similarly to a credit card and is backed by the equity in your home. You get approved for a defined credit limit based on your home's value. Then you can borrow money as needed during a "draw period". This draw period often lasts for 10 years.
During the draw period, you make interest-only payments. After that comes the "repayment period." This is the period where you begin to pay back both the principal and interest over a set period, typically, up to 20 years.
The credit line revolves. As you pay down your balance, you free up credit to use again.
How much can you borrow with a HELOC?
Most lenders let you borrow up to 85% of your home's value, less your mortgage's current balance.⁵ This is called your combined loan-to-value ratio.
Here's how it works: Say your home is worth $800,000 and you owe $350,000 on your mortgage. You have $450,000 in equity. A lender might approve you for up to $382,500 (85% of $800,000 minus your $350,000 mortgage).
Most lenders require you to keep at least 15% to 20% equity in your home, even after taking out the HELOC.
This handy HELOC Payment Calculator will help you calculate your monthly payment.
HELOC requirements
Credit score
Most lenders want a credit score of at least 680.² Some will work with scores as low as 620,³ but expect higher interest rates and stricter terms.
Income and employment
You need a steady income and employment history. Lenders want to see at least 2 years of stable employment, though self-employed borrowers may need additional documentation.
Debt-to-income ratio
Your total monthly debt payments (including the new HELOC) typically can't exceed 43% of your gross monthly income.⁴
Home appraisal
Most HELOCs require an appraisal to determine your home's current value. This might be a full appraisal or a quick drive-by appraisal where the appraiser only views the outside.
HELOC interest rates explained
HELOC rates are usually variable, tied to the prime rate. The prime rate is currently 6.75%.¹ Lenders add a margin on top of the prime rate, typically 0.5% to 1%.
Your actual rate depends on your credit score, income and how much you're borrowing. Better credit means lower rates.
Note* Be aware of low introductory rates. Some lenders offer super-low rates for the first six months to a year, then jump to much higher variable rates.
Fixed rate options
You can often convert all or part of your HELOC balance to a fixed rate. This protects you from rising interest rates on the converted amount.
Fixed-rate terms can last up to 20 years. Once you convert, that converted balance portion’s interest won't change, even if market rates rise.
HELOC costs and fees
Upfront costs
Closing costs typically range from 2% to 5% of your credit line amount,⁶ but this varies by lender and loan terms. On a $50,000 HELOC, expect to pay $1,000 to $2,500 in closing costs. Ask for a Loan Estimate before committing.
Ongoing fees
- Annual maintenance fees: $50 to $250 per year⁷
- Transaction fees: Some lenders charge each time you draw money
- Early termination fees: 2% to 5% of your outstanding balance if you close within 2-3 years⁸
Payment examples
If you borrow $50,000 at a 7.25% rate, your interest-only payment during the draw period would be about $302 per month.
When the repayment period starts, payments jump significantly. That same $50,000 balance would require payments of about $388 per month over 20 years.
HELOC risks to consider
Variable rate risk
Most HELOC rates change with market conditions. If rates rise, your payments increase. There's no cap on how high your rate can go unless your lender specifically provides one.
Home at risk
Your house secures the loan. Miss payments and you could face foreclosure, even if your mortgage payments are current.
Spending temptations
Easy (and quick) access to large amounts of credit can result in spending more than you planned. Interest-only payments during the draw period make it easy to accumulate debt you can't afford later.
Payment shock
When the draw period ends, payments can double or triple. Many borrowers aren't prepared for this jump from interest-only to full principal-and-interest payments.
Best uses for a HELOC
HELOCs work best for expenses that add value or provide long-term benefits:
- Home improvements that will ultimately increase your property’s value
- Debt consolidation at lower interest rates
- Education expenses
- Emergency fund backup
- Business investments.
Avoid using HELOCs for vacations, luxury purchases, or daily expenses you can't afford from your regular income.
HELOC vs other loan options
HELOC vs Home equity loan
- HELOC: Variable rate, revolving credit, interest-only payments initially
- Home equity loan: Fixed rate, lump sum, immediate principal and interest payments
HELOC vs Personal loan
- HELOC: Lower rates, home as collateral, larger amounts available
- Personal loan: Higher rates, no collateral required, fixed payments
HELOC vs Credit cards
- HELOC: Much lower rates, tax benefits possible, home at risk
- Credit cards: Higher rates, no collateral, smaller credit limits
HELOC tax deduction rules
Interest on HELOC funds used for home improvements may be tax-deductible. The Tax Cuts and Jobs Act limits this deduction to improvements on the home that secures the loan.⁹ The law also caps total deductible interest on home loans at $750,000 of combined mortgage and HELOC debt.
Interest on money used for other purposes typically isn't deductible. Consult your tax advisor for guidance on your specific situation.
How to get approved for a HELOC
The application process typically takes 2 to 6 weeks. You'll need:
- Proof of income (pay stubs, tax returns)
- Current mortgage statement
- Property tax records
- Homeowner's insurance information
- List of debts and monthly payments.
Most lenders offer online applications and digital document submission to speed up the process.
Managing your HELOC
During the Draw Period
- Make more than the minimum payment when possible
- Pay down principal to free up more credit
- Avoid maxing out your credit line
- Track interest rate changes
Preparing for repayment
- Budget for higher payments before the HELOC repayment period starts
- Consider converting some balance to fixed rates
- Build up savings to handle payment increases
When to avoid a HELOC
Skip a HELOC if you:
- Have unstable income or employment
- Struggle with current debt payments
- Can't handle variable rate risk
- Have plans to put your home on the market in the near future
- Want money for non-essential purchases
Apply for a HELOC today
A HELOC provides flexible access to your home's equity at rates far below those of credit cards and personal loans. The revolving credit structure allows you to borrow only what you need and only when you need it.
But the risks are real. Variable rates can increase your payments, and your home backs the loan. Use our HELOC calculator to estimate your potential credit line and monthly payments. Then talk with a lending specialist about whether a HELOC fits your financial goals.
Ready to explore your options? Apply for a HELOC today.
Key takeaways
- A HELOC is a revolving credit line that uses your home as collateral. This allows you to borrow money as needed, with rates typically lower than those on credit cards or personal loans.
- Typically, mortgage lenders will allow you to borrow up to 85% of your home's value minus your remaining home mortgage balance, but you must maintain at least 15-20% equity.
- HELOC rates are usually variable and tied directly to the prime interest rate, so your monthly payment can change if rates rise or fall. Expect a credit score of at least 680 and a debt-to-income ratio below 43%.
- Closing costs run 2-5% of your credit line, plus annual fees of $50-$250; payments jump significantly when the 10-year draw period ends and the repayment period begins.
- Use a HELOC for home improvements, debt consolidation or education; avoid it for vacations, luxury purchases or expenses you can't cover with your regular income.
HELOC Frequently Asked Questions
What credit score do you need for a HELOC?
Most lenders require a credit score of at least 680. Some lenders work with scores as low as 620, but you'll pay higher interest rates and face stricter terms. The higher your credit score, the lower your rate.
Can you use a HELOC for anything?
You can use HELOC funds for anything, but it's smartest to use them for expenses that add value or offer long-term benefits, such as home improvements, debt consolidation, education or business investments. Avoid using it for vacations, luxury items or everyday expenses you can't afford from your regular income, since your home backs the loan.
When the HELOC draw period ends, what happens?
When the 10-year draw period ends, the repayment period begins. You can no longer borrow new money, and your payments jump significantly because you now pay both principal and interest. A $50,000 balance that costs $302/month in interest-only payments might jump to $388/month over 20 years. Budget for this jump before it happens.
Is HELOC interest tax-deductible?
Interest on HELOC funds used for home improvements may be tax-deductible. Interest on money used for other purposes typically is not. Note: The Tax Cuts and Jobs Act limits the total deductible interest on home loans to $750,000 of combined mortgage and HELOC debt. Check with your tax advisor about your situation.
What's the difference between a HELOC and a home equity loan?
A HELOC is a revolving line of credit with variable rates and interest-only payments initially. A home equity loan gives you a lump sum upfront with fixed rates and immediate principal-plus-interest payments. Choose a HELOC if you need flexible access to funds; choose a home equity loan if you know exactly how much you need and want a fixed payment.
What if I can't make my HELOC payments?
Your home secures the HELOC, so missed payments could lead to foreclosure. Contact your lender immediately if you struggle to pay. Many lenders offer hardship programs, payment deferrals, or other options to help you avoid default.
How long does it take to get approved for a HELOC?
The process typically takes 2 to 6 weeks from application to approval. Most of the time is spent on the appraisal. Online applications and digital document submission speed up the process compared to paper-based applications.
Can you convert a HELOC to a fixed rate?
Yes. You can often convert all or a portion of your HELOC balance to a fixed interest rate. This protects you from rising interest rates on the converted portion. Fixed-rate terms can last up to 20 years.
Sources
1. https://primerates.com/primerate/current-prime-rate/
2. https://themortgagereports.com/127170/heloc-credit-score-requirement
3. https://www.lendingtree.com/home/home-equity/heloc/requirements/
4. https://www.amerisave.com/learn/heloc-requirements-you-must-meet-in
5. https://www.comerica.com/insights/personal/home-ownership/how-does-a-heloc-work.html
6. https://www.experian.com/blogs/ask-experian/how-much-are-home-equity-loan-heloc-closing-costs/
7. https://themortgagereports.com/127994/hidden-heloc-fees-how-to-spot-and-avoid
8. https://www.bankrate.com/home-equity/heloc-prepayment-penalty
9. https://www.freedommortgage.com/learn/home-equity/are-helocs-tax-deductible
*No fee will be assessed when converting to a fixed-rate option. If there is a current fixed-rate option that is requested to be unlocked, a $100 fee will apply. The fixed-rate option can primarily be done in person at an Associated Bank branch or by calling 1-866-LEND ABC (536-3222). (1331)