How Can A HELOC Help When You're Short On Cash?

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Key takeaways

A home equity line of credit (HELOC) lets you borrow against your home’s equity. It provides a revolving credit line with flexible access to funds.
HELOCs offer variable interest rates typically lower than credit cards and personal loans.
A HELOC uses your house as collateral. Failure to repay the money may result in losing your home.

Do you own property? You can borrow against what you own to access cash. There are a few equity products that allow for this. One popular one is a home equity line of credit or HELOC.

What is a home equity line of credit? It is a secured loan that taps into your home’s equity or how much you own. Unlike conventional loans that give you a lump sum of cash, HELOCs function similarly to credit cards. You receive a revolving line of credit that you can tap into at any time. Cover emergency expense s, pay medical bills, consolidate high-interest debt, or renovate your home. You can use the funds for whatever you need as long as you don’t exceed your credit limit.

Intrigued? Read on to explore how HELOCs work and how they can help when you’re short on cash.

What is a home equity line of credit?

A home equity line of credit is a loan that uses your home as security. It allows you to borrow money when you need to, up to a specific limit. The limit is based on the equity you have in your home. Equity is what you own in a home. It is the difference between your home’s value and the amount you still owe on your mortgage. For example, if your home is worth $300,000 and you owe $150,000 on your mortgage, your equity is $150,000.

A HELOC is a type of second mortgage. It allows you to access cash based on your home’s value while still carrying your original mortgage. If you foreclose on your home, you pay the primary mortgage first, then the HELOC.

Home equity lines of credit are similar to home equity loans. Both let you borrow based on the equity you have in your home. The main difference is HELOCs work like credit cards. You draw on the line of credit as needed and only pay interest on what you take out. You can pay off the balance and reuse the line of credit for several years.

Home equity loans, on the other hand, give you access to a lump sum of cash upfront. They are more like traditional installment loans and have fixed payment schedules.

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How much money can you borrow?

The amount you can borrow with a home equity line of credit depends on the equity you’ve built in your home. Lenders typically let you borrow a percentage of your home equity, often up to 80% or 85% of the home’s value, minus what you still owe on your current mortgage. This percentage is known as the combined loan-to-value (CLTV) ratio. In simpler terms, if your home is worth $300,000 and you owe $150,000 on your primary mortgage, your CLTV ratio would be 50% ($150,000/$300,000).

You can calculate how much you can potentially get by multiplying your home’s current value by how much the lender will let you borrow. Then, subtract the remaining mortgage balance. With a home worth $300,000 and a mortgage balance of $150,000, the maximum borrowing amount would be $105,000. ($300,000 x 0.85 = $255,000 – $150,000 = $105,000).

The exact amount varies based on your credit score, income, debt-to-income ratio, and the lender’s policies. Depending on your financial situation, some lenders may offer higher or lower combined loan-to-value limits. As always, it’s important to compare lenders before settling on a loan.

What are HELOC interest rates?

The annual percentage rate (APR) you receive on your HELOC depends largely on your credit score, existing debt, and the amount you borrow. Borrowers with very good to excellent credit and significant home equity will qualify for lower rates.

Most HELOC rates are variable. They are tied to the prime rate plus a margin set by the lender. When the prime rate rises or falls, your HELOC rate will adjust accordingly, which can impact your monthly payments.

Some lenders may offer a lower introductory rate for a limited time before adjusting to the standard variable rate.

While variable rates are the norm, some lenders also offer fixed-rate options. A fixed-rate allows you to lock in a portion of your HELOC balance at a set interest. This can provide more predictable payments during uncertain market conditions.

Whether you receive a fixed or variable rate, the interest will likely be lower than what you’d pay on a credit card or unsecured loan, closer to a mortgage rate. Bankrate found that the average HELOC rate was at 8.27% as of January 2025. Also, lenders are required to set a ceiling on how high your rate can rise during the loan term. The exact ceiling varies, but federal credit unions cannot exceed an 18% APR.

Getting the best rates for home equity loans

The first step in getting the best loan rates is to apply and compare offers from at least three different lenders. If you submit all your applications within a 45-day window, the multiple hard inquiries will appear as one on your credit report.

Start with your current mortgage provider or bank. They may offer discounts to existing customers. It’s also smart to inquire about fixed-rate HELOC and lock in a low APR when you can.

If you can’t get a satisfactory rate, focus on improving your credit score. Lenders offer lower rates to borrowers with stronger credit histories. Building more equity in your home can also help. A lower CLTV ratio often qualifies you for better terms. As does lowering your debt-to-income ratio.

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How does a HELOC work?

A home equity line of credit is a bit like a credit card. It allows you to borrow money against the value of your home. Unlike a standard loan, you don’t get a lump sum. Instead, you can access a line of credit from which you can draw as needed.

You are able to borrow, repay, and borrow again within your credit limit. The credit limit depends on how much equity you have in your home.

A HELOC has two phases – the draw period and the repayment period.

The draw period

During the draw period, you can borrow as much as you want each month from your line of credit. You can withdraw money via online bank transfers, checks, or a HELOC account card. Most lenders only require interest-only payments during the borrowing period. Payments toward the principal are optional. This period typically lasts for 10 years.

The repayment period

Once the draw period ends, the repayment period begins. You are not allowed to take out any more money but must pay the outstanding balance. You make both principal and interest payments until you’ve repaid all you borrowed. HELOCs generally have a 10 to 20-year repayment period.

How much does it cost?

The cost of a HELOC can vary. Besides the interest rate, lenders may charge:

Closing costs: Range from 2% to 5% of the loan amount.
Annual fees: Around $50 to $75 per year.
Termination fee: Around 2% of your credit line or maximum payment of $450 if you pay off the line of credit and close it within 24 months.

Not all lenders charge these fees. Other fees you may encounter include appraisal, origination, maintenance, or application fees. Generally, you’ll receive better terms if you have a steady employment history and a strong credit score.

What is the monthly payment on a $50,000 HELOC?

The monthly payment on a $50,000 HELOC depends on the interest rate, the amount withdrew, and whether you’re in the draw or repayment period. For the purpose of this example, let’s say you withdrew the full amount and have an 8.27% interest rate.

During the draw period, you make interest-only payments. You would pay approximately $344 per month. Once you enter the repayment period, both principal and interest are due. Your monthly payments would rise significantly. Repay the HELOC loan over 10 years, and your monthly payments will be approximately $614.

These figures can change based on your lender’s actual rates and terms. If you don’t use the full amount, then your payments will be lower. Like with a credit card, you only make payments on the money you’ve used.

Home equity line of credit requirements

What you need to qualify for a home equity line of credit varies by lender. Here’s a general guide to what most lenders require:

Home equity: Your home equity is the difference between your home’s value and what you owe. Lenders often require you to have at least 15-20% equity.

Credit score: A score of 620 or higher is often necessary. Higher scores can help you secure better HELOC interest rates.

Debt-to-income ratio (DTI): Your DTI is your total debt (mortgage, loans, credit card balance) divided by your gross monthly income. Most lenders require a DTI of 43% or less.

Verifiable income: You must provide proof of income – W-2s, pay stubs, tax returns, or bank statements. Lenders use this information to assess your ability to repay the loan.

Applicants with more equity, very good to excellent credit scores, and low DTI ratios will be approved for better rates and higher limits.

Can you get a HELOC with bad credit?

Getting a HELOC with bad credit – any score under 580 – is very challenging. Most lenders require a minimum credit score of 620, though most prefer scores over 680. It’s hard enough to find a lender willing to work with a borrower with fair credit, let alone poor.

You’ll have a better chance if you have substantial home equity, a stable income, and a low debt-to-income ratio. Another option is to add a co-signer with good credit. A co-signer assumes equal responsibility for the loan, so will be on the hook to pay if you don’t.

While you may be able to get approved, it will come at a higher cost. Expect higher interest rates and smaller limits. Your best bet is to build credit and then apply for a HELOC to get better rates.

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How to get a HELOC

Getting a HELOC is a similar process to getting a mortgage.

Check your home equity: Calculate your equity by subtracting your outstanding mortgage from your home’s market value. Then, decide how much you want to borrow.

Gather documents: You will need proof of income, homeownership details, and information about existing mortgages.

Shop around and apply: Apply with several different lenders and compare offers. Consider the interest rates, fees, maximum loan amounts, draw periods, and repayment terms. Look for favorable terms and consider the total cost.

Read disclosure documents: Read the documents provided by your lender carefully. Make sure the HELOC fits your needs.

Close and access funds: The underwriting process can take weeks, but not as long as a first mortgage. The lender may require a home appraisal as part of the process. Once approved, make sure everything looks good and sign. You’ll receive your credit line, and you can start using it.

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Ways to use a home equity line of credit

HELOCs can be used for anything, but the best way to use them will either generate income or save you money.

Common uses for HELOCs are:

Home improvement projects: A HELOC can fund renovations, enhancing the value of your home.
Debt consolidation: Pay off high-interest debt by consolidating it into a lower-rate HELOC.
Emergency expenses: Cover unexpected expenses like medical bills with accessible funds.
Education costs: Use a HELOC to pay for college tuition or other educational expenses.
Investment opportunities: Invest in stocks or real estate using the capital from a HELOC.

Be wary of using a HELOC to cover depreciating assets like cars or to use it for large optional expenses like vacations.

HELOC pros and cons

Pros:

Access to a line of credit you can reuse
Use the money for anything
Flexible withdrawals and repayment plans
Lower competitive interest rates
Only pay interest on the amount you use
Low payments for the first 10 years
Interest may be tax-deductible
No mortgage insurance
Tap into home equity without changing the original mortgage
Lower upfront costs than home equity loans
Low or no closing costs

Cons:

High credit score requirement
Risk of foreclosure and losing your home
Potential fees include annual fees and early closure fees
Interest rates can increase
Unpredictable payments as interest rates go up and down
Lenders may require a minimum draw
Late or missed payments can damage your credit
Home equity is reduced while you have a HELOC
You can run up a large balance if you’re not careful

Is a HELOC a good idea?

A HELOC can be a smart financial tool, but whether it’s a good idea depends on your financial circumstances and how you plan to use it. HELOCs often offer lower interest rates than credit cards or conventional loans. The low interest rates make them a cost-effective way to pay for home improvement projects, consolidate high interest debt, or cover significant expenses. The flexibility to borrow only what you need and pay interest only on the amount used can be beneficial.

The interest on a HELOC is also tax-deducible if you use the money to buy, build, or repair your home. You will have to itemize your taxes, and there are caps depending on how you file.

The problem with a HELOC is that it uses your home as collateral. You risk foreclosure if you’re unable to make payments. Since most HELOCs have variable interest rates, your payments could increase if rates rise. It’s generally recommended that you have a stable income so that you can still afford payments if the interest rates increase. Also, if you sell your home, you’ll likely have to pay off the entire HELOC at the point of sale.

A HELOC might be a good idea if you have significant home equity, a stable income, and a clear plan for using the funds to improve your financial situation. On the other hand, it’s not ideal for discretionary spending or small purchases. Do not use a HELOC to cover everyday expenses or make purchases that don’t build wealth, like a car or vacation. Be sure about your repayment ability before you commit.

Frequently asked questions

1. What is a HELOC?

A home equity line of credit is a revolving credit line secured by your home. It lets you borrow against the value of your home. HELOCs often have competitive interest rates and flexible repayment options.

2. Is HELOC interest tax deductible?

HELOC interest may be tax-deductible up to a certain limit if you use the funds to buy, build, or improve your property. You will need to itemize your taxes to take advantage of the deductions. Consult a tax advisor to confirm eligibility based on current IRS guidelines.

3. How long does it take to get approved for a HELOC?

Approval for a HELOC typically takes two to six weeks. The timeline depends on factors like home appraisal, credit checks, and lender processing times.

4. Can you cancel a HELOC?

You can cancel a HELOC within three business days after closing, thanks to the right of rescission under federal law. The three-day time period does not include Sundays but does include Saturdays. You will have to submit your request in writing, and the lender will refund any fees you’ve already paid. After that period, cancellation depends on lender terms.

5. Can a HELOC affect your credit score?

A HELOC can impact your credit score just like any other loan. When you apply, the lender will conduct a hard inquiry, which can temporarily drop your score by a few points. Make regular, on-time payments, and a HELOC can help build credit.

6. What should you do if you can’t make payments?

If you can’t make payments, contact your lender immediately. They may be able to modify the loan terms to make payments more affordable. You can also consider refinancing your HELOC loan for a lower rate.

7. Is a HELOC a second mortgage?

A HELOC is considered a second mortgage since your home secures it. If you end up in foreclosure, your primary mortgage takes priority.

Bottom line

HELOCs can be an excellent tool for consumers when used to pay for expensive projects or consolidate high-interest debt. They can help you make substantial improvements to the value of your home, invest in real estate, or pay less interest on your current debts.

As a secured line of credit, HELOCs are not without major risks. If you are unable to make payments, you could lose your home. Weigh the pros and cons and determine if borrowing through a home equity line of credit is the right financial move for you.

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Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.

How Can A HELOC Help When You’re Short On Cash?

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