What Is a HELOC and How Does It Work?

A Home Equity Line of Credit (HELOC) provides a revolving credit line secured by your home's equity, similar to how a credit card works. You borrow only what you need, up to your approved limit.

How Does a HELOC Work?

  • Loan Typically Capped At (borrowing limit): 95% CLTV
  • Credit Requirements: Credit check required; better scores secure better rates (many lenders prefer a credit score of 680 or higher for the best rates, though some may approve loans with scores as low as 620—with higher interest rates)
  • Interest Rate: Variable (floating interest rate). Most HELOCs include a lifetime interest rate cap that limits how high your rate can climb, though exact terms depend on your lender.
  • Draw Period: Typically 5–10 years, though some lenders may offer shorter or longer terms (interest-only payments during this period)
  • Repayment Period: Usually 10–20 years (principal + interest payments)
  • Prepayment Penalties: Typically none, but confirm with lender

Common Fees:

  • Home appraisal (digital or automated valuations may be available, which can reduce appraisal fees and speed up the approval process)
  • Processing fee (percentage or flat fee)
  • Title search and underwriting fees
  • Wire transfer fees
  • Broker fees (if applicable)

Where to Obtain a HELOC:

  • Credit Unions: Typically lower fees and direct servicing
  • Banks: Competitive terms and direct servicing
  • Brokers: Broader lender selection but potentially higher fees

Advantages of a HELOC:

  • Flexible borrowing
  • Interest-only payments during draw period
  • No prepayment penalties

Disadvantages of a HELOC:

  • Rising payments post-draw period
  • Risk of higher costs if not repaid promptly
  • Secured by your home
  • Requires a hard credit inquiry
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*The information provided on this page is for informational purposes only and does not constitute financial advice. Loan terms, rates, and eligibility criteria can vary by lender and individual circumstances. Always consult with a licensed financial advisor, mortgage specialist, or tax professional before making borrowing decisions.*