HELOC Requirements: HELOCs Explained

What Are HELOCS and Home Equity Loans?

HELOCs and home equity loans are two types of financing that allow borrowers to use their home as collateral to get the money they need.

Because the financing is secured and lenders are taking less risk, borrowers typically can find more competitive terms with these financing options than they might get with an unsecured personal loan or credit card. Interest rates are often more competitive, for example, and you may be able to borrow more.

Both HELOCs and home equity loans can be good choices for homeowners who are looking to access some cash, but each works a bit differently.

A HELOC is a revolving line of credit, which means you can borrow and make payments on an ongoing basis. With this type of financing, you’ll pay interest (usually at a variable rate) only on the amount you’ve actually borrowed, not the entire amount available to you.

In contrast, a home equity loan, sometimes called a second mortgage, is a lump-sum, fixed-rate loan that is repaid in regular installments over a specific length of time.

HELOC and Home Equity Loan Requirements

The eligibility requirements for HELOCs and home equity loans vary by lender, but they share some common criteria, including:

Sufficient Equity in Your Home

Lenders generally want borrowers to have a minimum of 15% to 20% equity in their home.

What is home equity? Your equity is the difference between your home’s current value and what you still owe on the mortgage, expressed as a percentage. So, for example, if your home is worth $300,000 and you still owe $200,000, you have $100,000, or 33%, equity in your home.

If you’re trying to determine if you can qualify for a HELOC and you aren’t sure what your home is worth, you can get an estimate using online tools. But when you actually apply for the HELOC, your lender will likely require that you get a home appraisal.

Good Credit

Expect scrutiny similar to what you likely experienced in the mortgage preapproval process: A credit score in the upper-600s is usually the minimum that’s necessary to get this type of financing. (This puts you in what is typically considered the “good” credit score range.) If your score is lower, but your application is strong in other areas, you may still qualify with some lenders. But the higher your credit score, the better the chances that you’ll be approved and get a lower interest rate.

Low Debt-to-Income (DTI) Ratio and Income Documentation

Don’t be surprised if applying for home equity financing gives you flashbacks to when you were trying to qualify as a first-time homebuyer. Lenders will want to know that you can afford to add another monthly payment to your current debt load, so they’ll calculate your DTI ratio (how much you owe in monthly debt payments compared to your monthly income). Home equity lenders generally look for a DTI that’s below 50%, but the lower your DTI, the better.

Lenders also will ask for income documentation, including recent W-2 statements, pay stubs, and/or income tax returns, to ensure you have enough income to manage your payments

How does a HELOC Work

HELOCs typically have two phases:

The Draw Period

Once a borrower is approved for a HELOC, the draw period begins. During this phase, the borrower can withdraw funds from the account at any time and in whatever amount is needed (up to the approved credit limit). The borrower usually is required to make interest payments during the draw period, but payments toward the principal may be optional.

The Repayment Period

When the draw period ends — usually after about 10 years — access to the line of credit ends and a new repayment schedule will be established based on the balance the borrower still owes. The repayment period typically lasts 10 to 20 years, and borrowers should be prepared for their variable interest rate to fluctuate during this time.

How Is a HELOC Calculated?

Here’s how you can get a general idea of what your HELOC might look like, based on your home equity.

•  Start by estimating how much your home is worth.

•  Next, multiply your home’s value by the percentage your lender will allow you to borrow.

•  Then, subtract what you currently owe on your home loan from the amount you’re qualified to borrow.

Let’s say, for example, that your home is worth $300,000, you still owe $200,000 on your mortgage, and your lender says you qualify to borrow up to 80% of your home’s value.

First, you’d multiply your home’s value by the percentage your lender will allow you to borrow.

  $300,000 x 0.8 = $240,000

Then, you would subtract the amount you owe on your mortgage from the amount you qualify to borrow:

  $240,000 – $200,000 = $40,000

In this example, your HELOC limit would be $40,000.

How Much Can You Borrow with a HELOC?

Depending on your credit, DTI, and other factors, you may be able to borrow up to 85% (or, in some cases, even more) of the value of your home, minus the amount you owe on your first mortgage.

If you’re wondering if that will be enough for your needs, remember that your home may be worth more than you think. Rising prices have made it tough for first-time homebuyers to get into the housing market in recent years, but thanks to those rising costs, current homeowners have seen a spike in their home equity. Even if you’ve only had your home for a few years, you may have enough equity built up to pay for a kitchen remodel or a new pool and patio out back.

That doesn’t mean you have to or should borrow the largest amount possible, however. To be safe, you may find it makes sense to hold onto a chunk of your equity (20% or more), just in case home prices fall.

Recommended: Different Types of Mortgage Loans

How to Apply for a HELOC

If you want to avoid potential delays and get the best possible loan terms for your financial situation, it can help to do your homework before applying for a HELOC. Here are some steps to consider:

1. Check Your Financial Health

If you aren’t sure where you stand financially, it can be a good idea to check your credit scores, calculate your DTI, and get a good estimate of your home equity before you apply for a HELOC. That way there won’t be any surprises.

2. Compare Lenders

Loans can vary significantly from one lender to the next, so don’t hesitate to do some online comparison shopping. It’s important to see what offers you might qualify for when it comes to interest rates, but also how much you can borrow, repayment terms, eligibility requirements, and fees.

3. Gather Your Documentation

Making sure you have the documents you need (proof of income, recent tax returns, mortgage info, etc.) all in one place can make the application process go more smoothly.

4. Submit Your Application

When you’ve settled on the lender you think has the best terms for you, it’s time to submit your application. You can do this from home with an online application. Or, if you prefer and your lender has a brick-and-mortar location near you, you can go in person.

5. Get a Home Appraisal

Your lender will likely require a home valuation as part of the application process. If you haven’t already, you may want to set aside some time to clean up and fix things that might hurt your home appraisal.

6. Prepare for Closing

If your lender approves your application, the next step is the closing process, which will include signing documents and paying any necessary closing costs.

HELOCs vs Home Equity Loans

There’s no one-size-fits-all answer when choosing between a HELOC and a home equity loan. Ultimately, it’ll be up to you to decide which type of financing is the best fit for your finances, your needs and goals, and your comfort level. Here’s a quick breakdown of some of the differences between these two types of financing that you may want to keep in mind:

	HELOC	Home Equity Loan
Disbursement of funds	Revolving credit line with a preapproved limit; timeline for using funds (draw period) is usually 10 years	Apply directly through the credit card issuer; hard pull on your credit
Repaying borrowed funds	Minimum (often interest-only) payments required during draw period; monthly payments of principal and interest during repayment period	Equal monthly installments for a predetermined length of time
Interest rate	Usually variable; interest paid only on what you owe and not the entire credit limit for which you are approved	Usually fixed; interest paid on the entire loan amount from Day One
Loan length	Draw period typically lasts 10 years; repayment period may last 10 to 20 years	Can range from five to 30 years
Closing costs	Varies by lender	Typically range from 2% to 5% of the loan amount

Pros and Cons of a HELOC vs a Home Equity Loan

Understanding the advantages and downsides of each type of financing can also help borrowers decide between a HELOC and home equity loan. Here are some points to consider:

Pros and Cons of a HELOC

What sets a HELOC apart from a home equity loan is that you pay interest only on the funds you’ve drawn, not the entire line of credit that’s available, which can keep your monthly costs down. And as you make payments, the line of credit is replenished, so you can borrow repeatedly during the draw period.

A potential downside of a HELOC vs. a home equity loan, however, is that a HELOC’s interest rate is usually variable. So if rates go up, it could make paying back what you borrowed more expensive than you planned. Here’s a summary of a HELOC’s pros and cons.

Pros and Cons of a Home Equity Loan

A lump-sum, fixed-rate home equity loan can be a good fit for borrowers who need all their money upfront, and for those who like to plan and want to know exactly what their monthly payments will be. But the costs associated with a home equity loan may be higher than with a HELOC. Here’s a summary of some of the pros and cons of a home equity loan:

Who Should Get a HELOC?

Because you can draw just what you need at any one time, and pay interest only on the amount you borrow, a HELOC can be a useful tool for those whose cost of living is unpredictable (so they aren’t sure how much they’ll need) or those who don’t need all their money upfront.

Who Should Get a Home Equity Loan?

A lump-sum home equity loan may be a better choice for borrowers who know exactly how much they need and expect to use most of the money right away. Borrowers who prefer a structured loan with regular payments also might prefer this type of financing.

How to Use a HELOC

You can use a HELOC for just about anything, but this type of financing can be especially useful for borrowers who expect their costs will be spread out over time. A HELOC can be a good way to pay for home improvement costs or educational expenses, for example, or to cover ongoing medical or dental treatments. It also can be used as a “rainy day” fund when emergency expenses come up.

HELOC Examples

Here are a couple of examples of how a HELOC might work for some hypothetical homeowners:

Example 1: Joe and Jane Johnson want to renovate their kitchen. They expect to spend $50,000 or more, but they don’t need the entire amount upfront, so they choose a HELOC to help finance the project. The Johnsons’ house is worth $450,000, and they owe $300,000 on their mortgage, so they have home equity valued at $150,000 to use as collateral.

Their lender will allow a total debt of $382,500 (85% of $450,000) to be attached to the property, which means the maximum HELOC they can get is $82,500.

  $450,000 x 0.85 = $382,500

   v$382,500 – $300,000 = $82,500

Example 2: Cindy Smith’s daughter needs braces, and the orthodontist says it will cost $7,000. Cindy’s house is worth $200,000, and she still owes $150,000 on her mortgage, so she has $50,000 in collateral to use toward a HELOC.

Cindy’s lender will allow a total debt of $160,000 (80% of $200,000) to be attached to her property, so she gets a HELOC for $10,000.

   $200,000 x .8 = $160,000

   $160,000 – $150,000 = $10,000

Cindy makes payments toward both the interest and principal every month to keep her balance down. And when she’s done paying for her daughter’s braces, she uses the replenished account to help her daughter pay some college expenses.

How Much Does It Cost to Get a HELOC?

Closing costs for HELOCs are generally lower than the typical homebuying closing costs or a cash-out refinance (which can range between 2% to 5% of the loan amount). But you still may encounter some fees when opening a HELOC.

The appraisal fee, which could be $150 to $500 or more, will likely be the highest expense. But other costs may include an application fee (paid when you apply), a loan origination fee, and administrative fees that cover the lender’s costs for opening your line of credit. You also may be charged a maintenance fee each year that your account is open.

Some lenders also may charge a transaction fee any time you make a withdrawal from your HELOC, an inactivity fee if you don’t use the account for a while, or an early termination fee if you close the account shortly after you open it.

These fees can add up over the years, so it’s important to be clear on what you’ll be charged before you sign on the dotted line.

How to Find Competitive HELOC Interest Rates

Because lenders’ rates and other terms can vary, it can make sense to shop around for the best offer you can get on a HELOC.

You don’t have to limit your list of contenders to just your current home mortgage lender. These days, it’s easy to hop online and get estimates from a variety of lenders, including large and small banks, credit unions, and online lenders. And while you’re there, you can look at more than just their rates. You may want to compare their qualification requirements, loan minimums and maximums, fees, the length of the draw and repayment periods they’re offering, and other factors.

What are Home Equity Rates Expected to Do in 2025?

As inflation has cooled and the Federal Reserve has signaled a rate drop on the horizon, many economists expect borrowing costs on home equity loans and HELOCs will likely fall.

HELOCs could become the more attractive financing option, because they typically come with a variable rate that may go down in a changing rate environment. Still, it’s important to weigh every factor and how it pertains to your individual situation before making a choice between a HELOC and a home equity loan.

Home Equity Loans and HELOCs vs Refinancing

Of course, there’s one more way you might be able to extract some money from your home (without selling it): A cash-out refinance is another option for homeowners who need funds for a major home project or other expense.

While a home equity loan or HELOC provides borrowers with a loan or line of credit that’s separate from their mortgage, a cash-out refinance involves taking out a completely new mortgage loan that will allow you to pay off your old mortgage plus receive a lump sum of cash.

The lender will decide how much more you can borrow based on your home’s value and other factors, then add that to the balance owed on your old mortgage to determine the amount of your new mortgage.

If you need a lump sum for a large expense, a cash-out refi might be something to look at — especially if you can get a lower interest rate or better loan terms. You’ll only have one payment to make, and one creditor to keep track of. But the requirements for getting a cash-out refinance can be stricter than those for a HELOC or home equity loan, and the costs may be higher.

Other Alternatives to a HELOC

Besides a home equity loan or cash-out refinance, other funding options you may want to compare to a HELOC include:

An Unsecured Personal Loan or Line of Credit

If you can qualify for an unsecured personal loan or personal line of credit in the amount you need, you could keep building equity in your home and avoid putting your home at risk of foreclosure. The interest rate with unsecured financing will likely be higher, though.

Credit Cards

Credit cards typically come with higher interest rates than HELOCs, which can make them much more expensive if you carry a large balance from month to month. But if you don’t need to borrow a lot at one time or carry a balance, a credit card can provide quick, convenient, and collateral-free access to funds. You also may be able to find a card that rewards you with cash back or credit card points you can use for travel or other purposes.

The Takeaway

If you’re looking for an affordable way to get the money you need for home projects, unexpected bills, or just about any other important expense, a home equity line of credit, or HELOC, may be your answer.

With a HELOC, you can turn your home equity into cash using a revolving line of credit that’s secured with your home. But unlike a home equity loan, you’ll pay interest (usually at a variable rate) only on what you actually borrow, not the entire amount available to you.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.