HELOC
A home equity line of credit (HELOC) is a line of credit secured by the value of your home above and beyond the balance owed. It's a revolving line of credit, so you can borrow on it as needed for the term of the loan and make payments based on your outstanding balance, much like a credit card.
How do home equity lines of credit work?
A HELOC works like a credit card: you can withdraw money as you need it and pay interest only on what you borrow. You'll make regular payments on the principal and interest, but with a HELOC, the payment schedule is flexible—you get to choose when to make payments.
HELOCs offer variable rates, and are typically much higher amounts than personal lines of credit.
How do you qualify for a HELOC?
Qualifying for a HELOC depends on an array of factors, including your credit score, income status, current debt obligations and the amount of equity you have available in your home. However, most lenders will require a minimum credit score of 620 or higher when considering if you qualify for a HELOC.
Eligibility also varies based on the lender, but a few common requirements include:
- A credit score of at least 620 (it may be possible to obtain a HELOC with a lower score)
- Income that’s sufficient enough to support both your existing mortgage and the new loan payments
- Stable employment history
- A debt-to-income ratio (DTI) below 43%
How much can you borrow with a HELOC?
The amount of credit you can get with your HELOC depends on your ability to repay. This means that the lender is going to consider your income and debts. The total amount of credit you can have from all your loans, including the HELOC, should be less than 40% of what you make in a year.
Lenders don't usually let you borrow more than 80% of the value of your home in all mortgages and lines of credit combined. This makes sure that if you couldn't pay off everything, there would still be enough money for the lender to get back their investment.
If the maximum amount allowed by these factors is $100,000, but you currently owe $50,000 on an existing mortgage or line of credit then there would only be $50,000 available under a HELOC. You may not be able to qualify for all this borrowing power due to other factors such as how much money you make or how much debt you already have.
What can the money from a HELOC be used for?
You can use the money from a HELOC for all sorts of things like:
- A home improvement project
- Emergency expenses like medical bills or job loss
- Investments like stocks and bonds
- College tuition/student loans
- Paying for a wedding or vacation
- Buy a car
- Purchase a vacation property