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What is a HELOC?

A home equity line of credit (HELOC) is a valuable tool to help you tap into your home's equity for cash as needed. Getty Images/iStockphoto

Stubborn inflation and higher interest rates are straining Americans' budgets and adding to rising debt. The Federal Reserve Bank of New York reported an increase of $394 billion in household debt in the fourth quarter of 2022. Total household debt now equals $16.90 trillion, $2.75 trillion higher than in the same period in 2019, just before the pandemic recession.

Not looking to stand pat, many are looking for strategies to pay off their debt. One way homeowners can achieve this goal is by taking out a home equity line of credit (HELOC). Understanding how a HELOC works and the benefits it delivers can help you decide if a HELOC is worth it for you.

If you think you could benefit from taking out a HELOC then start exploring your options here now or use the table below to check your eligibility. 

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What is a HELOC?

A HELOC is a second mortgage that enables you to cash out some of the equity in your home. The equity amount is your home's current value minus what you owe on the mortgage. If approved, lenders typically allow you to borrow up to 85% of your home's equity. Like a credit card, a HELOC is a revolving line of credit, so you can borrow money only when you need to, and repay the debt as you go. 

A HELOC consists of two periods:

  • Draw period: You can borrow as little or as much as you want during this borrowing period, typically lasting from two to 10 years. Depending on your lender, your payments during the draw period may be interest-only or include only a portion of the principal.
  • Repayment period. After the draw period, you'll enter the repayment period, where you can no longer borrow money. You'll follow a repayment schedule to zero out your balance by the end of the period, which is usually 20 years. Alternatively, your lender may require you to make a large "balloon payment" to pay off the balance. It's essential that you understand the terms of your HELOC, including the payment schedule to repay the loan, before you sign for one.

Keep in mind, a HELOC is a secured mortgage that uses your home as collateral. As such, you could lose your home to foreclosure if you fall behind on your payments.

Who benefits from taking out a HELOC?

A home equity line of credit is a valuable tool that may help you achieve a specific financial goal. Here's who might benefit from taking out a HELOC:

  • Borrowers who need funds to pay for a large expense. This can include a major home renovation or a car repair. If you use the HELOC on a home improvement that increases your home's value, you may be eligible for a tax deduction.
  • Homeowners who want to consolidate high-interest credit cards with a lower-interest loan. According to recent data from the Federal Reserve, the average interest rate for credit cards is 20.40%. If you have sufficient equity and meet eligibility requirements, you may be able to consolidate high-interest credit cards with a HELOC with a lower APR ranging from 7.75% to 11%.
  • Parents who want to help their child pay for college. Generally speaking, you should exhaust your financing options for federal grants and student loans before turning elsewhere for funds. If you've done that and still need additional funds, a HELOC may offer lower interest rates than a private student loan can.

If a HELOC sounds beneficial for your situation then start exploring your options online now. You can also use the table below to find some local options based on your zip code.

Mobile app users click here

How do you get a HELOC?

The timeline for obtaining a HELOC varies by lender, but the process could take two to six weeks. Follow these steps to get a HELOC and minimize or avoid delays.

  • Ensure you have sufficient home equity: Lenders typically look for you to have a minimum of 15% to 20% equity to qualify for a HELOC.
  • Shop and compare: As with other types of loans, it's wise to compare mortgage interest rates, fees and terms from multiple lenders to find the best HELOC available. You can shop your HELOC options by clicking here
  • Gather important documents: Contact the lender and ask what documents you must have when you apply for a HELOC. Typical information you must submit includes your ID, account statements, proof of income and mortgage statements. Having these documents ready to submit can help the process go efficiently. If your lender requires an appraisal, schedule one early to allow time for an appraiser to inspect your property and prepare a report.
  • Fill out an application: With your documents on hand, you can quickly submit your application. After you apply, be prepared to send any additional documents your lender requests. Your lender will then underwrite your loan, meaning they will review your income, credit score and other qualifications to determine if you're eligible for a new line of credit. 
  • Accept and close the loan. If approved, all that's left is to accept and sign your loan documents. You must wait through a three-day rescission period before you can begin drawing on your HELOC. During this "cooling off" period, you can cancel your loan if you change your mind.

You can use the table below to start researching rates and HELOC options now.

Mobile app users click here

When a HELOC isn't your best option

While HELOCs come with numerous benefits, they're not for everyone. For example, a HELOC would have little value to you if you don't have enough equity to achieve your goal, such as funding a home improvement project. Additionally, getting a HELOC may not make sense if you plan on selling your home in a few years since you must pay off your HELOC before you can close on the sale. Review your financial goals and consult your accountant or financial advisor before getting a HELOC.

The bottom line

Financial experts often advise against using a HELOC to finance a vacation, wedding, or a depreciating asset like a car or boat. Similarly, be careful about what you use any credit product for because you should never pay interest on money you don't truly need.

As a line of credit, a HELOC helps you control debt by allowing you to borrow money on an as-needed basis, up to your credit limit. By contrast, other types of loans may approve you and fund your account with a set amount, which may be more than you need.

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