Home Equity Line of Credit (HELOC)

Draw Period (Typically 10 Years)

• Access funds as needed up to your credit limit
• Make interest-only payments (or principal + interest if you choose)
• Can borrow, repay, and re-borrow like a credit card
• Flexibility to use as much or as little as needed
• Variable interest rate adjusts monthly or quarterly

Repayment Period (Typically 10-20 Years)

• Can no longer draw new funds
• Must make principal + interest payments
• Loan is amortized over remaining term
• Payments typically increase compared to draw period
• Some lenders allow you to re-apply for a new HELOC at this point

Equity Requirements

• Minimum Equity: Typically need at least 15-20% equity
• Maximum CLTV: Usually 80-90% combined loan-to-value
  • 85% CLTV is most common
  • Example: $500k home = max $425k total debt (first mortgage + HELOC)
• Calculation: Home value × CLTV% - existing mortgage = max HELOC

Credit Requirements

• Minimum Credit Score: 620-680+ (higher scores get better rates)
• Credit History: Good payment history, limited derogatory marks
• Debt-to-Income: Typically 43% or lower including HELOC payment

Income & Employment

• Stable, verifiable income
• Ability to repay the loan
• Employment verification
• 2 years tax returns (if self-employed)

Property Requirements

• Primary residence, second home, or investment property (CLTV may vary)
• 1-4 unit properties typically eligible
• Condos acceptable (some restrictions)
• Property must be in good condition
• Adequate homeowners insurance required

Common HELOC Fees:

• Application Fee: $0-$500 (many lenders waive this)
• Appraisal: $300-$600 (sometimes waived for existing customers)
• Closing Costs: $0-$1,000 (many lenders offer no-closing-cost HELOCs)
• Annual Fee: $0-$75 per year (if applicable)
• Inactivity Fee: Some charge if you don't use the line
• Early Closure Fee: Some lenders charge if you close within 2-3 years
• Transaction Fees: Fees for draws or transfers (uncommon)

Good News: Many lenders offer HELOCs with no closing costs and no annual fees, especially for well-qualified borrowers.

⚠️ Important Risks to Understand:

1. Variable Interest Rates

• Payments can increase if rates rise
• Budget for potential payment increases
• Review rate caps and worst-case scenarios

2. Payment Shock

• When draw period ends, payments increase significantly
• Must pay principal + interest during repayment period
• Plan ahead for this transition

3. Your Home is Collateral

• Failure to pay could result in foreclosure
• Must maintain property taxes and insurance
• Don't borrow more than you can afford to repay

4. Line Can Be Frozen or Reduced

• In severe market downturns, lenders can freeze credit lines
• If home value drops significantly, line can be reduced
• Unlike HECMs (reverse mortgages), HELOCs aren't guaranteed

5. Temptation to Overspend

• Easy access to funds can lead to overspending
• Use responsibly - it's debt, not "free money"
• Have a plan for what you'll use funds for

6. Impact on Home Equity

• Reduces equity you've built up
• May complicate future refinance or sale
• Less equity means less profit when you sell

Strategy 1: Interest-Only During Draw Period

• Pro: Lower payments initially
• Con: Balance doesn't decrease, payment shock when repayment period starts
• Best for: Those needing maximum cash flow flexibility short-term

Strategy 2: Pay Principal + Interest from Start

• Pro: Reduce balance, avoid payment shock, pay less interest
• Con: Higher payments during draw period
• Best for: Those who can afford higher payments and want to pay off debt faster

Strategy 3: Pay Off in Chunks

• Pro: Reduce balance when you have extra funds (bonus, tax refund)
• Con: Requires discipline and irregular income sources
• Best for: Those with variable income or windfall events

Strategy 4: Convert to Fixed-Rate Loan

• Some lenders allow you to convert all or part of balance to fixed rate
• Pro: Lock in predictable payments, protection from rate increases
• Con: May have higher rate than variable, fees may apply
• Best for: When you've borrowed what you need and want payment certainty

General Tax Information:

• Home Improvement: HELOC interest may be tax-deductible if funds are used to "buy, build, or substantially improve" your home (up to $750k loan limit for married filing jointly, $375k single)
• Other Purposes: Interest on HELOCs used for debt consolidation, education, or other non-home purposes is generally NOT tax-deductible (changed in 2018 tax reform)
• Documentation: Keep receipts showing how HELOC funds were used for home improvements
• Itemizing Required: Must itemize deductions to claim mortgage interest (vs. taking standard deduction)

Step 1: Check Your Credit & Equity (1 day)

• Review your credit report and score
• Determine your home's value (recent appraisal, online estimates, agent CMA)
• Calculate available equity: (Home Value × 85%) - Current Mortgage Balance

Step 2: Shop Lenders & Apply (1-3 days)

• Compare rates, fees, and terms from multiple lenders
• Submit application with required documentation
• Provide income verification, employment info, tax returns

Step 3: Appraisal & Underwriting (1-2 weeks)

• Lender orders appraisal (or may waive with automated valuation)
• Underwriter reviews credit, income, debt, and equity
• May request additional documentation

Step 4: Approval & Closing (3-5 days)

• Receive final approval and credit limit
• Sign loan documents (may be done at home or online)
• 3-day right of rescission period (cannot access funds for 3 days after signing)

Step 5: Access Your Funds (After rescission)

• Receive checks, debit card, or online access
• Draw funds as needed during draw period

✅ A HELOC May Be Right If:

• You have at least 15-20% equity in your home
• You need flexible access to funds over time
• You have ongoing or uncertain expenses (renovation, education)
• You want to keep your low first mortgage rate
• You're comfortable with variable interest rates
• You want a backup emergency fund
• You have discipline to not overspend
• You plan to stay in your home for several years

❌ A HELOC May NOT Be Right If:

• You need a one-time lump sum (consider home equity loan instead)
• You're uncomfortable with variable rates
• You lack the discipline to manage revolving credit
• You're planning to sell your home soon
• You can't afford potential payment increases
• You have a high first mortgage rate (consider cash-out refi instead)
• You have limited equity (under 15%)
• Your credit score is below 620

Cash-Out Refinance

• Better if: You have a high first mortgage rate and want to refinance anyway
• Benefit: Fixed rate, potentially lower rate than HELOC
• Drawback: Replaces your current mortgage (bad if you have low rate)

Home Equity Loan (Second Mortgage)

• Better if: You need a lump sum and want predictable fixed payments
• Benefit: Fixed rate and payment
• Drawback: Less flexible than HELOC

Personal Loan

• Better if: You need a small amount and don't want to use home as collateral
• Benefit: Faster approval, home not at risk
• Drawback: Higher interest rates, lower borrowing limits

0% Credit Card

• Better if: You need short-term financing you can pay off in 12-18 months
• Benefit: No interest if paid during promo period
• Drawback: Lower limits, high rate after promo ends