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Best HELOC Lenders

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Written by Jennifer Schurman
Edited by Cassidy McCants

You might be considering a home equity line of credit (HELOC) if you want to complete a home renovation project or consolidate debt. A HELOC could be a low-interest credit option for covering these costs, but there are some considerations to keep in mind before applying for one.

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What is a HELOC?

A home equity line of credit (HELOC) lets you borrow funds based on your equity value, though you typically need at least 15% equity in your property. With a HELOC, you can borrow money up to a specified limit and only pay interest on funds you've withdrawn from the line of credit.

A HELOC is a second mortgage, meaning it doesn’t replace your primary mortgage like refinancing your loan does.

How does a HELOC work?

A HELOC is similar to a credit card because it’s a revolving line of credit, which means you can make purchases up to a specified credit limit repeatedly, paying off the debt as you go — then withdraw funds again as needed. However, there is a limit to how long you can borrow using a HELOC.

A HELOC has two phases: the draw period and the repayment period. During the draw period (which can be from five to 10 years), you can withdraw money up to the credit limit. Like with a credit card, you’re expected to make minimum monthly payments during the draw period, though these are often interest-only payments that don’t go toward paying off the principal.

After the draw period closes, you’ll enter the repayment period, during which you make principal and interest payments until the balance is paid off. Repayment periods are often longer than draw periods, so a 10-year draw period could have a 20-year repayment period.

The credit limit is calculated as a percentage of the home’s appraised value, minus your principal balance. Most lenders typically set the percentage (called a loan-to-value ratio, or LTV ratio) between 60% and 85%.

Say your home has a current appraisal value of $250,000. The outstanding balance on your mortgage loan is $160,000. If you obtain an 80% LTV HELOC, you may be able to borrow 80% of $250,000, minus the $160,000 you still owe on your mortgage. Your potential credit limit may equal $40,000.

A HELOC and a home equity loan are similar in that they both draw funds from the equity in a property. However, they differ in how and when these funds are disbursed.

With a home equity loan, the funds are distributed as a sum of cash upfront. Home equity loans generally come in handy for situations where the borrower knows exactly how much money they need. With a HELOC, funds are disbursed as needed during the draw period, giving borrowers more flexibility.

Pros and cons of HELOCs

There are several benefits to using a HELOC. First, it gives you access to funds as needed rather than as a lump sum, which is ideal if you have an ongoing project and aren’t sure of the total costs.

Interest rates on HELOCs are also typically lower than with other forms of revolving credit. For example, the average HELOC rate in July 2022 was 4.87%, according to Insider, compared with the average credit card rate of 20.82%, according to LendingTree.

Also, unlike credit cards, HELOCs have a predetermined repayment period. During this time, you won’t be able to make any additional purchases, which can help you focus on paying off the remaining balance.

HELOCs can also be used for many different purposes (not just home improvement projects). You might use a HELOC to consolidate credit card debt, pay for a wedding or fund medical or school expenses, for instance.

There are some drawbacks to a HELOC. One of the most significant drawbacks is that your home serves as the collateral, which means you risk losing it if you can no longer make payments. Another potential downside is that HELOCs typically have adjustable rates. This means your payment amount could change, making it harder to budget for repayment over time.

You also have to pay some closing costs upfront when you start a HELOC (like appraisal and recording fees).

Some lenders set a minimum transaction amount, which might mean you have to borrow more than you planned. For example, if the minimum withdrawal is $300 and you only need $200, you must decide whether you want to borrow more than you need.

Pros

  • Access funds as needed
  • Interest rates may be lower than other options
  • Can be used for a variety of purposes
  • Predetermined repayment period

Cons

  • Risk losing your home in the event of default
  • Typically a variable interest rate
  • Closing costs can be expensive
  • May cause overspending

How are HELOC rates determined?

Most HELOCs carry a variable interest rate, which can increase or decrease during the draw and repayment periods. Variable interest rates are always changing and are closely tied to the prime rate or another publicly available index and a lender margin. Federal law requires lenders to set a cap on how much the rates can increase over time.

Rates also vary based on the borrower’s credit profile. In general, borrowers with excellent credit (800 and above) will be eligible for the lowest rates available.

Interest rates can also depend on the LTV ratio. Lenders tend to view LTV ratios over 80% as more of a default risk, so they compensate for that risk by increasing the interest rate — so borrowers with an LTV ratio of 80% may secure lower rates than those with 85% or 90%.

When is a HELOC a good idea?

Using a HELOC may make sense if it can save you money over the long term. For example, you can use a HELOC to pay off high-interest credit card balances, but you should consider all the fees associated with a HELOC (like closing costs) before deciding. Also, evaluate the impact a new credit line may have on your spending and your budget.

A HELOC might also be beneficial if you use it to fund a long-term project that requires consistent access to cash for ongoing expenses. You can make purchases only as needed and pay off the principal during your draw period as your budget allows. Paying off balances sooner means you’ll pay less in interest overall.

When a HELOC doesn’t make sense

You should avoid using a HELOC if it’s likely to send you further into debt. The temptation with a new credit line is to overspend, which has long-term consequences for your credit. If you use a HELOC to pay off credit card balances, you’ve now tied that debt to your home — if you default on your HELOC payments, you could lose your property.

HELOC requirements

You need at least 15% to 20% equity in your home based on the current appraised value. Most lenders also look for a credit score of 680 or higher to qualify for a HELOC.

You also need to show proof of income (like when you first applied for a mortgage loan). Lenders tend to look for evidence of a stable income to ensure you can manage the monthly payments. A low debt-to-income ratio (DTI ratio) is also ideal. Each lender may set a different DTI cap, but most look for a DTI ratio of 43% or lower.

If you get a HELOC from a lender that’s not your current mortgage lender, you may need to show proof of payment history. Lenders need to see you can manage your existing debt effectively.

How to choose a HELOC lender

As with any borrowing decision, it’s a good idea to read customer reviews and gather quotes from multiple lenders before making a decision. Some lenders may discount upfront fees; others may offer lower rates. You should consider the overall cost of the HELOC, including all fees and charges.

You can use these points to compare lenders:

Type of interest rate offered: A HELOC may have a variable rate, a fixed rate or a combination of both (e.g., a variable rate that converts to a fixed rate after a specified period of time). Variable rates could be lower than fixed rates given the current market, but they also have the potential to rise higher in the future.

A variable rate may save you money in the short term, while a fixed rate may offer more predictable payments over time.

Introductory rate: HELOC lenders may offer a low introductory rate to entice you. You could find a HELOC with a 1.99% rate for the first 12 months, followed by a rate increase.

Consider how long you need access to funds and when you can repay. You may be able to save money using a HELOC with a low intro rate if you can pay back the principal before the rate expires. Some lenders also offer rate discounts if you make an initial withdrawal of a specific amount.

Interest rate cap: This cap limits how much your interest rate can rise during a given time frame. Lenders should disclose both periodic adjustment caps (how much the rate can increase from one adjustment period to another) and lifetime caps (how much the interest rate can increase over the life of the HELOC).

Fees and charges: Fees vary based on the lender and may include annual fees, an inactivity fee or an early termination fee. Compare these fees based on how you plan to use the HELOC. You can also expect to pay some closing costs. Some lenders offer no-closing-cost HELOCs, but there are conditions you must meet (like keeping the credit line open for a certain amount of time) to take advantage of the savings.

How to apply for a HELOC

The application process for a HELOC is similar to the mortgage loan application process. It may not require you to answer as much personal and financial information, but you will need to answer questions about your current income, assets and debt. The lender will likely request proof of income and other documentation, like a W-2 and bank statements.

The lender will then use your financial information, like your DTI ratio, credit score and equity, to determine if you qualify for a HELOC. It will also use this information to determine your credit limit and interest rate.

Before you apply for a HELOC:

It’s important to have a goal and purpose in mind for how you’ll use the HELOC. For example, if you plan to renovate your home, you should estimate costs and develop a timeline for the project before you apply. This can help you decide how long a draw period you’ll need.
It’s a good idea to assess your financial situation ahead of time so you can find the right HELOC for you. Lenders generally use your credit score, DTI ratio and equity value to determine your eligibility.

Check your credit report for any inaccuracies and request your credit score. You can find the estimated market value of your home on some real estate sites (though your home may end up appraising for less than what shows online). Your equity is equal to the appraised value of the home minus your current mortgage balance.

Most lenders disclose the starting rates and fees for HELOCs directly on their websites. You can also use online calculators to estimate your payment.
When you’ve found a lender that offers a HELOC that suits your needs, you can complete your application. Be prepared to input your income, asset and debt information. The lender will also require a home appraisal.
Once you get a HELOC, ensure that you withdraw only what you need and can afford to repay. It’s also important to make on-time payments — your payment history is reported to the credit bureaus and will ultimately affect your credit score.

HELOC alternatives

If you want to use your equity without taking out a line of credit, you might consider other loan and refinancing options. Home equity loans, cash-out refinances and reverse mortgages all allow borrowers to use their equity for a variety of purposes.

Home equity loan

A home equity loan lets you borrow against the equity you have in your home. Home equity loans are typically disbursed in a single payment and are generally repaid with fixed monthly payments.

Cash-out refinance

A cash-out refinance is a type of refinancing that lets you convert some of your equity into cash. It involves taking out a new mortgage loan larger than your existing balance, paying off your old mortgage loan and keeping the balance in cash. Generally, you can choose between adjustable- or fixed-rate options.

Reverse mortgage

A reverse mortgage is generally for individuals 62 and older. This senior-specific option lets homeowners borrow against the equity in their homes. The lender makes a lump sum or regular payments to the homeowner or provides a line of credit, and the loan doesn’t need to be repaid until after the borrower dies or moves out of the house.

FAQ

What is equity in a home?

Equity is the difference between your home’s appraised value and your outstanding mortgage balance. It reflects your ownership stake in the property.

What is negative equity?

Negative equity can occur when your home’s appraised value is less than the outstanding mortgage balance you owe. With negative equity, you owe more on your home than it’s worth.

How do you get a line of credit?

You can usually apply for a HELOC online through a lender’s website. Once you complete an application, the lender pulls your credit report and asks for proof of income documents to get the process started. The lender may also request a home appraisal before determining whether you qualify and how much you can borrow.

What can I use my HELOC for?

You can use a HELOC for a variety of purposes, including consolidating credit card debt, making home improvements, paying for education, covering medical bills or funding a special event.

Is a HELOC a good idea?

A HELOC could be a good idea if you have equity in your home and need to finance a large project. You should carefully evaluate the pros and cons before you make a borrowing decision.

How does a HELOC affect your credit score?

A HELOC’s effects on your credit score depend on whether you make payments on time and how you use the funds. If you use the money to pay off credit card balances, your credit utilization ratio will improve, which could raise your score (credit utilization can make up a sizable part of your score).

It’s important to note a HELOC itself does not affect your credit score in the same way credit cards do because it’s not included in the revolving credit utilization calculation.

Bottom line: Is a HELOC right for me?

A HELOC could be the right option for you if you have home equity and need consistent access to cash over a period of time — as long as you can handle the repayment and any potential rate increases. However, it may be smarter if you have a significant amount of equity in your home to go with a more predictable home equity loan or cash-out refinance — as long as you have an accurate idea of how much cash you need for your project or other funding purpose.

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page. Specific sources for this article include:
  1. Experian, “What Is a Draw Period on a HELOC?” Accessed Aug. 2, 2022.
  2. Consumer Financial Protection Bureau (CFPB), “What you should know about home equity lines of credit.” Accessed Aug. 3, 2022.
  3. Insider, “The average HELOC interest rate by loan type, credit score, and state.” Accessed Aug. 2, 2022.
  4. LendingTree, “Average Credit Card Interest Rate in America Today.” Accessed Aug. 2, 2022.
  5. Experian, “How Does a HELOC Affect Your Credit Score?” Accessed Aug. 4, 2022.
  6. Experian, “What Credit Score Do I Need to Get a Home Equity Loan?” Accessed Aug. 3, 2022.
  7. Consumer Financial Protection Bureau (CFPB), “1026.40 Requirements for home equity plans.” Accessed Aug. 3, 2022.

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