How to get a HELOC

A HELOC is a home equity line of credit that you can use to make major expenditures, such as home renovations, credit card bills, or college tuition. Applying for a HELOC is a straightforward process. HELOCs are available to many homeowners because the requirements are relatively simple. If you have enough home equity, a good credit score, a reasonable amount of debt, and a stable work record, you may qualify.

HELOC qualifications

Because a HELOC is based on equity, you must have an appropriate amount of equity in your home. What’s equity? It’s the difference between what your home is worth and how much you owe on your mortgage(s). How much equity should you have in the home? Lenders may have differing standards, but generally, they’ll want you to have at least 20%. So, if your home is worth $300,000, lenders would like you to have at least $60,000 in equity. Of this amount, you’ll be able to borrow up to 80% ($48,000 in this example). If your home has increased in value over time, this can help you meet the 20% equity requirement. The greater your equity, the more money a lender is likely to loan you. You don’t need to provide additional collateral, as a HELOC is secured by your home.

How to apply for a HELOC

Learning how to get a line of credit begins with personal research.

1. You can begin by getting your credit score. Your credit score should typically be at least in the mid-600s to qualify. Generally, lenders will offer better interest rates on loans to customers with higher credit scores.
2. Next, add up all your debt. This includes your mortgage, personal loans, auto loans, and credit cards. If your minimum monthly payments total 40% or less of your monthly income, you have a better chance of getting approved for a HELOC.
3. If your credit score and debt look good, it’s time to look at your home’s value. This is a big factor in determining how much you can borrow. You can check a real estate site like Zillow to get an idea of how much your home is worth.
4. Next, gather the required paperwork, such as proof of income via your paystubs or tax records.
5. Find your latest mortgage statement and your property tax statement. And don’t forget your Social Security number and your home insurance policy.

Once you’ve prepared all these items, the application process is relatively simple — and can even be handled online.

HELOC closing costs

When you choose a loan like a HELOC, closing costs are a natural part of the process. These costs help pay for services required to secure your loan seamlessly. While closing costs can vary from lender to lender, they typically range from 2% to 5% of your total line of credit. A credit score check is one of your closing costs. While you can check your score for free to see where you stand, a lender runs a more detailed credit check as part of the application process. The fee for doing so is included in your closing costs. Some closing costs cover things to protect you and your property. For example, lenders often require a document preparation fee, which can involve working with legal professionals in some states. A title search is done, which confirms your property is free from liens and claims. This important step helps ensure you can move forward with your HELOC with confidence, knowing your home’s title is clear. Once you are approved, your lender will secure the HELOC with a new lien on your property. Local authorities typically charge a small fee to record this lien, which is passed along as a loan recording fee in your closing costs. Finally, when you sign your loan documents, a notarization fee is charged to ensure your HELOC is executed properly and securely.

How does HELOC repayment work?

You might be wondering how you make payments toward a HELOC. The short answer: different HELOCs work different ways. For example, with a Homebridge HELOC, you make “interest-only” payments for the first five years. After those five years, you enter the repayment period, which lasts 25 years. During this time, your payments are both principal and interest. The interest rate for a HELOC is adjustable each month depending on market conditions. This will be explained in the HELOC Agreement. If you want to repay your loan in full before the repayment period begins, talk to your lender.