What is a HELOC?

What is a HELOC?

A HELOC (home equity line of credit) is a revolving form of credit with a variable interest rate, similar to a credit card. The line of credit is tied to the equity in your home. It allows you to borrow and repay funds on an as-needed basis during a specified period of time. After that, you’ll pay back the amount you borrowed in installments.

Typically, the total length of a HELOC is 30 years.

Your home is the collateral for the line of credit, which means falling behind on payments puts your home at risk of foreclosure.

How does a HELOC work?

When you’re approved for a HELOC, you’ll be given a credit limit based on your available equity in your home. Borrowers can usually tap up to 80 percent of their home’s value (sometimes as much as 85 or 90 percent, depending on lender policy and if they’re very well-qualified), minus outstanding mortgage balances.

During an initial draw period, you can spend the funds using dedicated checks, a draw debit card or online transfer. You’ll need to make monthly interest payments on the amount you borrow, but as you pay back your HELOC, the funds will be replenished. This draw period typically lasts 10 years.

After that, you’ll enter a repayment period, during which you’ll no longer be able to access funds and instead need to repay the principal and any outstanding interest. Most HELOC plans allow you to repay the remaining balance over a period of 10 years to 20 years. Some lenders also provide the option to refinance your HELOC once the repayment term ends.

While you’ll often only be on the hook for interest payments during the draw period, you can pay both principal and interest during this phase if you choose. This can help keep your payments manageable when you enter the repayment period.

“Maximize your HELOC by reviewing your balance during the draw period to make sure you aren’t overspending,” says Linda Bell, senior writer on Bankrate’s Home Lending team. “To manage payments effectively, you can explore options such as interest-only payments or fixed-rate conversions. By incorporating HELOC payments into your long-term financial plan, you can protect your financial well-being and keep your home safe from potential risks.”

How HELOC interest rates work

The interest rate on a HELOC is variable — that is, it changes periodically, moving up or down in accordance with general interest rate trends. These fluctuating rates are based on benchmarks like the U.S. prime rate, an average derived from the amount individual banks charge their most creditworthy customers. The prime is turn based on the federal funds rate (the rate that banks charge other banks for short-term loans). 

For HELOCs, lenders typically take the prime interest rate and add several percentage points to it to come up with your credit line’s interest rate.

The variable interest rate means the minimum required payment on your HELOC can change from month to month. Some lenders, however, allow borrowers to convert a portion of the outstanding variable-rate balance on a HELOC to a fixed interest rate. As a result, you can lock in a rate so that your payments will no longer vary and instead you’ll have stable, predictable amounts to repay. This can typically be done any time during the HELOC’s draw period. 
In addition, it’s also possible to obtain a fixed-rate HELOC, meaning the interest rate you pay on money borrowed remains the same for the life of the draw period and during the repayment period as well.

Why HELOCs are popular in 2025

Approximately 1.3 million new HELOCs were established in 2023, and then around 800,000 more through the third quarter of 2024. These numbers are comparable to pre-pandemic originations. But what’s really interesting is that, after more than a decade of decline, HELOC balances continue to climb, growing by $7 billion in the third quarter of 2024. That’s the10th consecutive quarterly increase since the first quarter of 2022.

HELOCs’ appeal largely lies in their flexibility: Akin to a giant credit card, the funds can be tapped gradually, on an as-needed basis. Borrowers can take out only what they require and pay interest only on what they use. 

Also adding to their appeal of late: They’ve gotten less expensive. Rates began retreating consistently last autumn and, as of January 2025, have reached 8.28 percent — their lowest levels in more than a year – spurred on by the Federal Reserve cutting its benchmark interest rate several times in late 2024. 

Some experts anticipate HELOC rates falling even further in 2025. Greg McBride, CFA, chief financial analyst for Bankrate, forecasts average HELOC rates to reach 7.25 percent by the end of the year — a low that hasn’t been seen since 2022.

Whatever their rate, HELOCs also tend to be less expensive than other forms of consumer debt, like credit cards and personal loans. And, unlike a cash-out refinance — the old go-to way to tap a homeownership stake — HELOCs allow a homeowner to hang onto a mortgage with a low interest rate.

HELOC requirements

There’s no one-size-fits all set of requirements to qualify for a HELOC. That said, the criteria commonly include:

• Significant home equity stake: Lenders typically require homeowners to have at least 15 percent to 20 percent equity in the home.
• Good credit score: Homeowners generally need a credit score in the mid-600s — at least — to qualify for a HELOC. You could conceivably be approved with a lower score, but you’ll likely have a higher interest rate. 
• Low DTI ratio: Many lenders want to see a debt-to-income (DTI) ratio of 43 percent or less. This means your monthly obligations eat up less than half of your monthly income. However, certain lenders might approve you with a DTI ratio of up to 50 percent.

How to apply for a HELOC

• Review and strengthen your credit. A strong credit score, ideally in the 700s, will get you the most favorable rate and terms. To improve your credit, make all payments on time — catching up on any past-due ones — and try to settle or at least pay down any outstanding balances. Review your credit report to correct any errors. Do all this several months before you actually apply.
• Find a HELOC lender. Even a small difference in interest rate can save you thousands in the long run, so it pays to shop around and compare offers before choosing a lender. “Comparison-shop with at least three lenders and before choosing one, make sure you consider all of the loan costs, not just one aspect, like the closing costs or interest rate,” says Bell. “Knowing all of the costs upfront can help you plan your budget and avoid any nasty surprises down the road.” Don’t commit to a lender until you’re crystal clear on what they charge (such as annual maintenance charges and early closure fees).
• Apply for the HELOC. Depending on your lender, you can do this in several ways: in person, over the phone or online. Just like applying for a mortgage, you’ll need to fill out a lot of forms and submit various documents to get a HELOC. Be prepared to provide proof of income (like pay stubs, W-2s or tax returns), bank statements and retirement account or brokerage statements. You’ll typically need to provide information about your mortgage and other property-related financial commitments, including recent mortgage statements and proof that you’ve paid your property taxes and homeowners insurance.
• Hurry up and wait. The lender will order an appraisal of your home to determine its current value. The appraiser’s assessment of overall home worth determines how much equity you have available, which in turn helps set the size of your line of credit. Your lender might get back to you with a preapproval or an initial decision within days; others require you to wait until the whole underwriting process is done.

How much can you borrow with a HELOC?

The amount you can borrow with a HELOC depends on several factors, including your creditworthiness, the value of your home and of your equity stake, and your loan-to-value ratio (LTV) — the sum total of all your home-based debt vis-à-vis your home’s value. Typically, lenders will allow you to borrow up to 80 to 90 percent of your home equity.

For example, if your home is valued at $300,000 and your mortgage balance is $200,000, you have $100,000 in equity. If the lender demands you keep 20 percent of that stake untapped, you could have a line of credit of $80,000.

You don’t have to use the full amount of your HELOC all at once. You can choose to spend part of your allowable credit, and the remaining amount will still be available for you to use in the future. For instance, if you have $100,000 in available credit and only use $65,000, you’ll still have $35,000 left in your credit line. You’re only required to pay back the portion of credit you use.

How to calculate your HELOC borrowing limit

To determine how much you can borrow with a HELOC, start by calculating your loan-to-value ratio (LTV). 

Say your home appraised at $375,000 and you still owe $150,000 on your mortgage. Simply divide $150,000 by $375,000, then multiply by 100 for a percentage. In this case, you’d have a 40 percent LTV ratio. This means you’d have 60 percent equity (or $225,000) in your home.

With a HELOC, you can usually borrow up to 80 percent of your combined LTV (CLTV). The CLTV takes into account the value of your home and what you owe on your first mortgage, plus the maximum you want to borrow via the HELOC: the combined total of all your home-based debt, in other words.

Say your lender allows up to an 80 percent CLTV. Using the above example:

So, even though your total equity stake is worth $225,000, your HELOC borrowing limit would be $150,000.

What are the pros and cons of a HELOC?

HELOCS have various advantages and disadvantages.

What should you do if you’re rejected for a HELOC?

If your HELOC application is rejected, the essential first step is to understand why. Common reasons include a low credit score, insufficient income, high debt-to-income ratio, or not enough home equity.

Following your denial, consider these steps:

1. Request a letter of denial: You have the right to receive a written explanation or letter of denial from the lender, which outlines the reason for the rejection. This letter can provide clarity on financial areas to focus on for future applications.

2. Address the reason for the denial: Once you understand why you were denied, you can take steps to rectify the situation. For example, if your credit score was a factor, you might focus on improving it by paying bills on time, reducing outstanding balances, or correcting any credit report errors. If insufficient income was the issue, you could look into a side hustle or perhaps a gift or forgivable loan from family.

3. Reevaluate the home: Sometimes the fault, dear borrower, is not in you but in your home. If the appraisal deemed it insufficient to secure the credit line (or as big a line as you wanted), examine it carefully for mistakes (did they get the square footage wrong? Mis-count the number of bedrooms? Use outdated comps?) You could also get a second appraisal, albeit at your own expense.

4. Talk to other lenders: Different lenders have different risk tolerances and qualification standards for HELOCs — there are those that specialize in bad-credit applicants — so taking your business elsewhere might bring you better luck.

A rule of thumb following a HELOC denial is to wait approximately six months before submitting a new credit application — to the same lender, at least.

Home equity line of credit FAQ

• Is it better to get a HELOC or a home equity loan?

  It depends on your goals. A HELOC could be better than a home equity loan if you want a source of funds you can access on an as-needed basis. The line-of-credit arrangement also means you’ll only pay interest on the amount you borrow, at least initially. With a home equity loan, you’ll be responsible for interest on the entire loan balance, even if you don’t use all the funds. If you’re planning to cover a significant but indeterminate expense in the near future and want to have a pool of cash readily available, a HELOC might also be the better choice. That’s only if you don’t mind a variable interest rate, however (unless the lender offers otherwise), and a fluctuating monthly payment.

• How does a HELOC affect your credit score?

  Your lender will conduct a hard credit check when you apply for a HELOC, which can cause a slight, temporary decrease in your credit score. This type of credit check typically stays on your credit reports for two years, though it might only impact your credit score for up to a year. Apart from that, the way you use and repay your HELOC could impact your score. Borrowing against a HELOC can increase your credit utilization ratio, which factors into your credit score. A higher credit utilization ratio could result in a lower credit score. That said, paying down your HELOC over time could help you build credit.

• What fees do HELOCs have?

  The cost of a HELOC can vary depending on a number of factors, including the lender, the terms of the loan, interest rates and the amount borrowed. And then there are any extra expenses, aka closing costs: origination fees, application fees, appraisal fees. Some HELOCs also carry annual fees, a charge for locking in your interest rate, and an early termination penalty, if you close the credit line within a year or two of opening it, or before the repayment period ends.

  You can get a sense of these fees’ cumulative costs by comparing a HELOC’s current interest rate with its current annual percentage rate, or APR, when you start looking around. The APR factors in both interest and other charges. Sometimes the difference can be a full percentage point or even more.

• What are alternatives to HELOCs?

  There are two main alternatives to a HELOC: a home equity loan or cash-out refinancing. While a HELOC works like a credit card — giving you a maximum amount you can borrow at a variable interest rate — a home equity loan works more like your mortgage. You get a lump sum of money, and you repay it on a set schedule with a fixed interest rate. Though the criteria are similar to HELOCs’, they might be easier to qualify for.

  Likewise, a cash-out refinance replaces your current mortgage with a new, bigger one, allowing you to pocket the difference. Both types of loans take your equity into account when determining how much you can tap. As mortgages, cash-out refis typically have lower credit score minimums (620-640, vs. 680 and up) and lower interest rates than HELOCs. But the rate might be a lot higher than your original mortgage — depending on when you got it — and the application process might be more onerous.

  Personal loans and credit cards are other potential alternatives, but the interest rates on these products are often higher than HELOC rates. The repayment terms are shorter, too.

Additional reporting by Taylor Freitas