What is a Home Equity Line of Credit and how can you get one?

Life’s expensive and full of surprises–but thanks to certain credit products and options, it doesn't have to be. 

While you might have credit cards, personal lines of credit, and other loans, you might also want to see how your house can step in. One of the silver linings to owning is being able to qualify for a Home Equity Line of Credit (HELOC).

And while it may be a little jarring to think your home can give you access to funds, it’s not as scary of a process as you might think. 

First off, what is home equity?

To understand a HELOC, it’s important to  understand home equity. In the easiest terms, home equity is how much of your home you own vs. the mortgage you have left to pay back. 

If your home is currently worth $750,000 and your mortgage balance is $450,000, that means your home equity is $300,000. 

So then what is a HELOC and how does it work? 

Despite how complicated its name may be, a HELOC works similarly like a revolving line of credit. This line of credit, which is borrowed against your home, works like other lines of credit where you have a limit that you can pull funds from. But, thanks to the lack of restraints on when you can pull some funds, a HELOC offers more flexibility allowing you to withdraw money on a daily or weekly basis.

However, if you are approved for a HELOC, it’s important to know that lenders will often apply a time frame known as a draw period, where you’re allowed to withdraw money. This draw period is usually anywhere from three to 10  years. 

On some occasions, once your draw period ends, your lender may let you renew the line of credit, but if not you’ll have to start repaying what you owe over a period of time, known as the repayment period. Prior to the repayment period, however, you’ll at least need to make monthly interest payments on the money you pulled out. 

Overall, the length of a HELOC term can vary but can go up to 30 years (usually a 10-year draw period and a 20-year repayment period).

How much can you borrow?

How much money you’re able to get in your HELOC is dependent on a couple factors like your credit and unpaid debts, as well as the current value of your home, and what’s left on your mortgage. 

However, most lenders often allow a loan-to-value ratio (a calculation of the amount being borrowed compared to the value of the asset) that doesn’t exceed 80% of your home’s value and mortgage. Similarly, most lenders often won’t let the HELOC exceed more than 65% loan-to-value ratio, with some lenders not letting you exceed more than 50%.  

Credit score and debt aside, the best way to calculate that is: