A Home Equity Line of Credit (HELOC) is a type of loan that allows homeowners to borrow against the equity in their home, providing a flexible source of funds that can be used for various purposes, such as home improvements, education expenses, or emergency situations. A HELOC operates much like a credit card, in that it provides a revolving line of credit that the homeowner can draw from as needed, up to a pre-approved limit. The borrower only pays interest on the amount drawn, and the funds can be borrowed and repaid multiple times during the draw period.

To qualify for a HELOC, homeowners must typically have at least 15-20% equity in their home, which is the difference between the home’s value and the outstanding mortgage balance. Lenders also look at the borrower’s credit score, with most requiring a minimum score of 620-680, depending on the lender and the borrower’s overall financial profile. The borrower’s debt-to-income (DTI) ratio is also considered and should generally be below 43-50%. Some lenders may offer higher credit limits to borrowers with significant equity or excellent credit.

HELOC interest rates are usually variable, meaning they can fluctuate over time based on market conditions. The rates are generally tied to the prime rate, which can change as the Federal Reserve adjusts interest rates. As a result, HELOC rates typically start lower than fixed-rate home equity loans, often ranging from 5-7%. However, because the rates are variable, they can increase during the loan term, making monthly payments less predictable. Some lenders offer fixed-rate options for HELOCs, allowing borrowers to lock in a rate for a portion of the balance.

The maximum loan limits for HELOCs are based on the amount of equity the homeowner has in their property. Typically, lenders allow borrowers to access up to 85% of the home’s appraised value, minus any outstanding mortgage balance. For example, if a home is worth $400,000 and the homeowner owes $200,000 on their mortgage, they may be able to borrow up to $140,000 with a HELOC. HELOCs usually come with a draw period of 5-10 years, during which the borrower can access funds, followed by a repayment period of 10-20 years. During the draw period, borrowers typically make interest-only payments, but once the repayment period begins, they must start paying back both principal and interest.

HELOCs are ideal for homeowners who need access to funds over an extended period of time and want the flexibility of drawing only what they need. Because they offer lower initial interest rates and flexible repayment options, HELOCs are a popular choice for funding home renovations, paying off high-interest debt, or covering large, unexpected expenses.