All You Need to Know About HELOCs

If you're a homeowner needing a bundle of cash, look no further than your home. By tapping into your home's equity, you're eligible for a loan with a generally lower interest rate and easier eligibility requirements. One way to do this is by opening up a home equity line of credit or a HELOC. 

Let's take a closer look at HELOCs and why they can be an excellent option for cash-strapped homeowners. 

What is a HELOC?

A HELOC is a revolving credit line that allows homeowners to borrow money as needed against the equity of their home. The HELOC is like a second mortgage on a home; if the borrower owns the entire home, the HELOC is a primary mortgage. Since it is backed by a valuable asset (the borrower's house), it is a secured debt and typically has a lower interest rate than unsecured debt, like credit cards. You will need to pay closing costs for the line of credit, which usually equal 2-5% of the total value of the loan.

How much money can I borrow through a HELOC?

The amount of money you can take out through a HELOC depends on your home's total value, the percentage of that value the lender allows you to borrow against and how much you currently owe on your home. 

Many lenders only offer homeowners a HELOC that allows the borrower to maintain a loan-to-value (LTV) ratio of 80% or lower. 

A quick way to estimate the maximum amount you can borrow with a HELOC is to multiply your home's value by the highest LTV the lender allows. For example, if your home's value is $250,000 and your lender allows you to borrow up to 80% of this value, multiply 250,000 by 0.80. This will give you $200,000. Subtract the amount you still owe on your mortgage (let's assume $100,000), and you'll have the maximum amount you can borrow using a HELOC: $100,000. 

Is every homeowner eligible for a HELOC?

Like every loan and line of credit, HELOCs have eligibility requirements. Exact criteria will vary, but most lenders will only approve the line of credit for homeowners who have a debt-to-income ratio of 40% or less, a credit score of 620 or higher and a home with an appraised value that is at minimum 15% more than the amount owed on the home. 

How does a HELOC work?

A HELOC works similarly to a credit card. Once you're approved, you can borrow as much or as little as needed and whenever you'd like during the draw period. The draw period generally lasts five to ten years. Once the draw period ends, the borrower can begin repaying the loan or refinance to a new loan. 

How do I repay my HELOC?

The repayment schedule for a HELOC can take one of three forms:  

Some lenders allow borrowers to pay the loan's interest during the draw period. When the draw period ends, the borrower will make monthly payments toward the loan's principal and interest payments. 

For many borrowers, though, repayment only begins when the draw period ends. At this point, the HELOC generally enters its repayment phase, which can last up to twenty years. During the repayment phase, the homeowner will make monthly payments toward the HELOC's interest and principal. 

In lieu of an extended repayment phase, some lenders require homeowners to repay the balance in one lump sum when the draw period ends. This is also known as a balloon payment. 

How can I use the funds in my HELOC?

There are no restrictions on how you use the money in your HELOC. However, it's generally not a good idea to use a HELOC to fund a vacation, pay off credit card debt or help you make a large purchase. If you default on your repayments, you risk losing your home, so it's best to use a HELOC to pay for something with lasting value, such as a home improvement project. 

How does a home equity line of credit differ from a home equity loan?

A home equity loan is a loan in which the borrower uses their home's equity as collateral. Like a HELOC, the homeowner risks losing the house if they default on the loan. The amount the homeowner can borrow here will depend on their LTV ratio, credit score and debt-to-income ratio.

However, there are several important distinctions between the two. Primarily, in a home equity loan, the borrower receives all the funds in one lump sum. A HELOC, on the other hand, offers more freedom and flexibility as the borrower can take out funds as needed throughout the draw period. Repayment for home equity loans also works differently; the borrower will make steady monthly payments toward the loan's interest and principal over the fixed term of the loan. 

A home equity loan can be the right choice for borrowers who know how much they need to borrow and would prefer to receive the funds upfront. Budgeting for repayments is also simpler and can be easier on the wallet since payments occur over the entire loan term. Some borrowers, however, would rather have the flexibility of a HELOC. They may also anticipate being in a better financial place when the repayment phase begins, so they don't mind uneven payments. 

If you're a homeowner needing extra cash, consider taking out a HELOC through KeyPoint. Call (877) 888-9634, visit or stop by a branch today!