A home equity line of credit (HELOC) is another tool available to homeowners for borrowing money. Similar to a credit card, the funds are drawn from a line of credit and you can use the funds for a variety of purposes. The flexibility of borrowing what you need, when you need it, makes a HELOC even more appealing.
Comparing your options can lead you to the best lender for your situation. Your choice depends on several factors, including loan amounts, interest rates, and repayment terms.
- Best HELOC lenders
- HELOC basics
- Calculate your home equity
- Alternatives to HELOCs
- Frequently asked questions
Best HELOC lenders
Every lender has different qualification requirements, rates, and fees, which makes comparing multiple lenders a critical step when pursuing a HELOC.
| Maximum CLTV | Minimum line amount | Maximum line amount | Fees and closing costs | |
|---|---|---|---|---|
| Bank of America | Not disclosed | $25,000 | $1 million | None |
| Flagstar Bank | 80% | $10,000 | $1 million (based on approval) | None |
| U.S. Bank | Not disclosed | $15,000 | Up to $750,000 ($1 million for properties in California) | Annual $90 fee |
| PenFed | 90% | $25,000 | $500,000 | Closing costs ranging from $500 to $8,500, $99 annual fee to keep line of credit open |
Best for: A HELOC with a fixed-rate option
Bank of America is one of the largest banks in the country, and it offers a variety of financial products and services — including HELOCs.
Pros
- Online application process, including uploading documents and checking the status of your application
- No closing costs
- Extended customer service hours for HELOC applications, available six days a week
- Option to convert an existing variable-rate HELOC to a fixed-rate, which can shield you from rising interest rates
Cons
- HELOC interest rate discounts are only offered to clients who are enrolled in the Bank of America Preferred Rewards program
- Minimum credit line amount of $25,000 required to apply online
- Maximum amount of $1,000,000 for a primary residence credit line and $500,000 for a second residence, when applying online
Flagstar Bank
Best for: Low minimum borrowing option
Flagstar Bank is one of the largest mortgage loan originators in the country. While its physical branch locations are limited to nine states, it can service loans nationwide.
Pros
- Credit lines available for as little as $10,000
- Borrow up to $1,000,000 (based on approval)
- No closing costs if the line is open at least 36 months
Cons
- Draw period is limited to 10 years, with 20-year repayment plans
- Annual fee of $75 (waived the first year)
- No online application process
U.S. Bank
Best for: Convenient options to withdraw funds
U.S. Bank is another large national bank, operating in all 50 states. It offers a wide range of financial services and some accounts may qualify for an interest rate discount on a HELOC.
Pros
- No application fees or closing costs
- Multiple methods to withdraw funds, from in-person to using an access card
- Offers fixed-rate HELOCS
- Online quote, application, and uploading documentation process
Cons
- An annual $90 fee is charged, unless you’re a U.S. Bank Platinum Checking account holder
- Higher rates if you have a loan-to-value (LTV) above 60% and/or a credit score less than 730
- HELOC not available in Texas, South Carolina, or Delaware
Pentagon Federal Credit Union
Best for: Using a credit union with a large national footprint
Pentagon Federal Credit Union, or PenFed, offers membership to anyone in the U.S. who meets its account eligibility requirements. It services the entire country and offers a vast portfolio of financial products, like HELOCs and cash-out refinancing.
Pros
- Option to switch from variable to fixed interest rate
- May be eligible to carry multiple HELOCs with PenFed
- Opportunities to lock in fixed rates in advance of borrowing
Cons
- Borrowing range is limited to $25,00 up to $500,000
- Charges closing costs between $500 to $8,500
- Charges a $99 annual fee to keep line of credit open
Methodology
To identify the best companies for home equity lines of credit, Credible looked at data points in the following categories:
- Rates
- Fees
- Loan minimums and maximums
- Loan terms
- Maximum combined loan-to-value (CLTV) ratio
- Transparency
Credible started with a list of 26 major lenders and ruled out 18 because they didn’t offer a home equity line of credit product. Credible then gathered as much information as possible from the remaining lenders’ websites to evaluate their HELOCs.
If you can’t find what you need from these four lenders’ offerings, or just want to shop around more, consider local and regional credit unions and banks for more HELOC options.
How does a HELOC work?
A HELOC is a type of second mortgage. You can borrow money and use your home or property as collateral to secure the credit. If you’re unable to make your payments, the lender uses the collateral as a guarantee. It also means if you sell your home, then you have to close and pay off the HELOC.
You can draw cash as you need it during a specified draw period, and within the credit limit established by the lender. The repayment period is open, which means you only make repayments once you’ve borrowed against the credit line.
As a borrower, you only pay interest on the amount you draw and the interest rates are typically variable. While a HELOC doesn’t usually include interest points — also known as discount points, these can lower your interest rate but you may end up paying an upfront fee — there are other possible fees involved, such as closing costs. So, it’s important to shop around to compare lenders’ charges for fees and interest rates.
To qualify for a HELOC, most lenders require you to have equity available in your home. You are generally allowed to borrow up to 85% of the value of your home, minus how much you owe on the property. Other factors are also considered, such as credit score, monthly income, and debts, similar to when you applied for the first mortgage.
Calculating your home equity
Your HELOC depends on how much equity is currently in your home or property, but that doesn’t mean the lender will let you tap all of it. In order to determine the amount of home equity you have, you must subtract your current mortgage balance from your home’s latest market value.
Since most lenders typically allow you to borrow up to 85%, you’ll need to figure out the maximum combined loan-to-value ratio, which is the combination ratio of all secured loans for a single property in comparison to the value of the property.
| For example: Your home was recently appraised for $500,000 and the remaining balance on your mortgage is $325,000. To calculate the LTV: $500,000 x 0.85 = $425,000 (maximum LTV) Then, subtract your remaining mortgage balance from the LTV: $425,000 – $325,000 = $100,000 So, your maximum LTV is $425,000, but you can only tap up to $100,000. |
Because of the higher CLTV ratio, there is less equity to borrow from your home.
HELOC alternatives
Homeowners have other options to consider besides a HELOC, such as a home equity loan, a cash-out refinance, or a reverse mortgage.
| HELOC | Home equity loan | Cash-out refinance | Reverse mortgage | |
|---|---|---|---|---|
| Fund type | Credit line | Lump sum | Lump sum | Lump sum |
| Repayment | Generally a 10-year draw period, 20-year repayment period | 5-30 years | Up to 30 years | No set term length |
| Interest rate | Typically variable, but fixed rates are possible | Fixed | Fixed or adjustable rate | Fixed or variable |
| Closing costs, points, and fees | Closing costs, possible annual fee | Closing costs | Closing costs | Closing costs, mortgage insurance premium |
What’s the difference between a home equity loan and a HELOC?
A HELOC allows you to draw funds as you need it, whereas a home equity loan provides you with a lump sum upfront. The interest rates for a HELOC are generally variable, while interest rates for a home equity loan are fixed. A home equity loan has a fixed repayment period, such as 10, 15, or 20 years, but a HELOC includes a specific draw period and one longer repayment period.
Home equity line of credit FAQs
Here are a few commonly asked questions about home equity lines of credit.
What are the requirements to get a HELOC?
For starters, you must have equity in your home. Your credit score, monthly income, and monthly debts will all need to be verified, similar to applying for your first mortgage. Most lenders prefer to lend to a borrower with a credit score of at least 680, a debt-to-income ratio no higher than 43%, and at least 20% home equity.
What are the benefits of a HELOC?
The homeowner can draw on the credit line only as needed. A HELOC typically has lower interest rates compared to credit cards or personal loans, and you can use the funds in a variety of ways, including consolidating debt. Plus, there may be tax advantages too, since it’s a type of mortgage.
Do HELOCs have good rates?
Most HELOCs have low variable interest rates, but the rate could go up based on market fluctuations. Depending on your credit, your rate could be 1 to 2 percentage points below what is typical for a 30-year, fixed-rate mortgage. However, your rate will be much higher if your credit is less than ideal.