What Is a Home Equity Line of Credit? Everything You Need to Know

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what is a home equity line of credit

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Your home is likely one of your most valuable assets. As such, it might be nice to get some benefit from it from time to time.

If you feel this way, you’re not alone. The St. Louis Federal Reserve reported that, as of March 2018, there’s approximately $371.7 billion in outstanding home equity lines of credit (HELOC).

If you’re interested in tapping the ownership you have to make home improvements or pay off bills, it can make sense to consider whether a HELOC is right for you.

What is a HELOC?

“Basically, a home equity line of credit is a loan that functions like a credit card, but is secured with your home,” said Laura Mael, the public relations officer at Settlers bank. She’s a 30-year banking industry veteran and has experience in mortgage lending.

The amount you can borrow is based on the amount of equity — or ownership — you have in your home. When you buy a home with a mortgage, it’s the bank that actually fronts the money, so you can’t really be said to own the home.

However, as you make payments on the mortgage, and as your home’s value increases, you end up with more equity until, finally, no more money is owed on your home.

Along the way, though, you have the chance to tap into the ownership you’re building with a special loan.

“Banks are happy to dole out these HELOCs because they can come after your home if you don’t pay,” said Terence Michael, a mortgage broker with Omni-Fund.

With a HELOC, you’re offered a line of credit. You’ll pay interest on charges you make. But as you make payments, your funds become available again — without the need to reapply for the loan.

Mael said most HELOCs come with variable rates, and the minimum payment on the loan typically covers interest charges.

How much can you borrow?

As mentioned above, a HELOC is based on how much ownership you’ve built up in your home. With an FHA loan, the maximum loan-to-value (LTV) ratio you can have after a HELOC is 85%.

Other lenders, though, might have other requirements. You might be limited to 80% LTV. Or you could find a bank willing to lend you up to 95%.

For example, let’s say your home is worth $250,000 and you owe $150,000 on an FHA loan. Right now you have $100,000 in equity but want to get a HELOC.

If you can only borrow up to a total of 85% LTV, that limits you to a cap of $212,500 on your total mortgage debt. You don’t have $100,000 available to you. Instead, you can only borrow up to $62,500.

When does a HELOC make sense?

Now that you know what a HELOC is, it’s time to figure out when it makes sense to get one. Here are four suggestions for using a HELOC.

1. Home improvements

Mael said that this approach makes the most sense with a HELOC.

“You might need to make a series of purchases without wanting to reapply for another loan,” Mael said. “Plus, you can increase the value of your home and get a good interest rate.”

When getting a HELOC, though, Mael warned against situations where you might not be able to repay the principal as well as interest.

“If you’re only ever going to make interest payments, the principal will never go down and you risk tying up all your equity into the loan,” she said.

On the other hand, Mael pointed out, your home improvements might increase the value of your home so that when you sell it, the loan is paid off. She suggested carefully considering your situation to avoid borrowing more than you can handle.

2. Paying off student loan debt

Depending on your student loan situation, it can make sense to pay off student debt using a HELOC.

“In many instances, the interest rate on the home equity line of credit is lower than on the student loan,” Mael said.

That was the case for Josh Hastings, the founder of Money Life Wax, a personal finance blog.

“Our big reason for using a HELOC is that our variable rate is at 4.00%,” said Hastings. “Compare that to our federal loan rate, which was 7.90%.”

Using this strategy, Hastings is able to repay his debt more quickly and with lower interest charges:

“By using a home equity line of credit, we are able to pay ahead on our student loans then drive down our HELOC to wash, rinse, and repeat,” he continued. “It has allowed us to get ahead on our student loans while minimizing the interest we pay.”

This isn’t the best strategy for everyone, though. Depending on your credit score and income, it’s possible to get an even lower rate when you refinance your student loans.

Plus, with student loan refinancing, your debt remains unsecured. If you can’t make payments on your debt, you could lose your home. Consider whether you’ll get better results by refinancing or taking on a home equity loan.

3. Consolidating high-interest consumer debt

If you can’t seem to get ahead of your credit card debt, using your home equity to pay it off could help, Mael said.

The lower rate on a HELOC allows you to save on interest while consolidating your debt. However, when you use this strategy, you take on debt secured by your home.

Mael recommended proceeding with caution when using this approach. “Pay down the amount representing credit card debt quickly,” she said. “Stop adding to the HELOC until the portion representing your credit cards is taken care of.”

If you have access to a zero-interest credit card, it can make sense to use it instead of a HELOC. Look for a credit card with a 24-month introductory period so you have time to pay it off while avoiding interest.

Another consideration is to pay off your credit card debt using a personal loan. Depending on your credit situation, you might be able to get a low-rate personal loan for credit card consolidation. Even if you pay more in interest on your personal loan than with a HELOC, it’s still an improvement over your current credit card rates.

Our credit card consolidation calculator can show you how much you could save using a personal loan to consolidate debt.

Consolidate credit cards with a personal loan

4. Using it as an emergency fund

Sometimes, big things just happen, Michael pointed out.

“If you need the safety net of having access to a large amount of money because something might happen, such as losing a job, a HELOC is a great option,” Michael said.

In fact, he’s used this strategy himself. “Just like a credit card that sits empty in your wallet, it can be there providing a sense of security,” Michael said. “You don’t have to use it unless absolutely necessary.”

However, when you keep an open HELOC, there might be fees. Depending on the lender, said Michael, those fees can be anywhere between $75 and $200 a year. But if you haven’t saved up a large emergency fund, a HELOC might work as a stand-in until you have built up your bank account.

When to avoid using a HELOC

Access to such a large amount of cash can be tempting. But being irresponsible with a line of credit could lead to financial trouble down the road.

“Just like a credit card, there’s no limit to how you use this money,” said Michael. “That can be an issue. If you’ve maxed out your HELOC and don’t have any increasing or additional income elsewhere to pay the growing bill, you’re stuck — and you could lose your house.”

So while it’s tempting to use a HELOC for any number of purposes, Mael and Michael both agreed that there are some things you shouldn’t tap the equity in your home to pay for:

  • Vacation
  • Wedding
  • Expensive jewelry
  • Boat (or other leisure vehicles)
  • Stocks

“Instead, save up the money for the things you seek to purchase,” Mael said. “With investments, you can’t be sure your return will always beat the variable rate on your HELOC, and then your home is at risk.”

Mael also pointed out that some things, such as vacations, weddings, and luxury items, can be planned for. She suggested opening a savings account. You can then set up automatic transfers to effortlessly save up for your goals.

Decide if a HELOC is right for you

Whether you have $10,000 or $100,000 available to you with a HELOC, it’s vital that you consider your situation and the purpose of the loan before you sign on the dotted line.

Mael, Hastings, and Michael all pointed out that discipline and planning are needed in order to avoid losing your home down the road.

Shop around for the best rate possible on your home loan to ensure that you’re getting a good deal. Additionally, don’t forget to look at other types of loans. Personal loans, student loan refinancing, and zero-interest credit card offers can all provide ways to help you meet your goals without putting your home at risk.

Finally, think about whether you have time to save up for your goals. While a HELOC can provide cash in a pinch, it might be better to save up for emergencies and plan ahead for big purchases. That way, your home isn’t held hostage.

“What is a home equity line of credit? Basically, it’s the most amazing credit card ever created,” said Michael. “But as with all powerful things, it comes with great responsibility.”

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LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.990% APR to 16.240% APR (with AutoPay). Variable rates from 5.75% APR to 14.60% APR (with AutoPay). SoFi rate ranges are current as of March 18, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.75% APR assumes current 1-month LIBOR rate of 2.50% plus 4.28% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  5. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  6. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.

3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate DisclosureFixed interest rates from 6.79% – 20.89% (6.79% – 20.89% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

  • Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 9.99% APR to a high of 35.99% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.

†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com

**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.

7 Important Disclosures for Earnest.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.

** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

5.75% – 16.24%1$5,000 - $100,000

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7.69% – 35.99%$1,000 - $50,000

Visit Upstart

7.99% – 35.89%*$1,000 - $50,000

Visit Upgrade

5.99% – 24.99%2$5,000 - $35,000

Visit Payoff

5.99% – 29.99%3$7,500 - $40,000

Visit FreedomPlus

6.79% – 20.89%4$5,000 - $50,000

Visit Citizens

9.99% – 35.99%5$2,000 - $25,000

Visit LendingPoint

6.95% – 35.89%6$1,000 - $40,000

Visit LendingClub

6.99% – 18.24%7$5,000 - $75,000

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9.95% – 35.99%8$2,000 - $35,000

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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