How to apply for a home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a flexible borrowing solution that lets homeowners access the equity they have in their homes. It can be used for a wide range of expenses, such as home improvements, education costs, or consolidating debt.

Before you apply, though, it’s important to understand how a HELOC works, decide if it fits your financial goals, and become familiar with the basic requirements you’ll need to meet.

While Rocket Mortgage^® doesn’t currently offer HELOCs, we’ll explain them so you understand all your borrowing options.

What is a HELOC?

A home equity line of credit lets you borrow money using your home’s value as collateral. It works more like a credit card than a traditional loan, meaning you can borrow what you need, pay it back, and borrow again during a set amount of time, known as the draw period. During the draw period, you can withdraw funds as needed up to a limit set by your equity. You can usually do so via check, online transfer, or a card linked to your line of credit.

When you’re approved for a HELOC, the lender will give you a credit limit based on the equity you’ve built in your home. You’ll only pay interest on the amount you spend, not the full amount you’re approved for.

Most HELOCs have a variable interest rate, which means your rate and monthly payment can fluctuate depending on market conditions. If interest rates increase, your borrowing costs could increase, too.

When the draw period ends, you enter the repayment phase. At that point, you can’t borrow any more money, and you’ll start paying back what you owe, plus interest.

HELOC requirements

Just like mortgage requirements, precise HELOC requirements will vary from lender to lender. That said, here are some of the common things most lenders look for:

• Reliable income: Most lenders will ask for proof of income to make sure you can pay off your loan.
• Good credit: A credit score above 700 is considered ideal, but some lenders will approve a HELOC with a lower score.
• A good loan-to-value ratio (LTV): You should have at least 15% – 20% home equity, meaning your loan balance should be no more than 85% of your home’s value.
• Responsible payment history: Lenders may look back at your previous payment history to make sure you haven’t had late or missed payments.
• Manageable debt load: The lower your debt-to-income (DTI) ratio, the better. DTI is the percentage that tells lenders how much you spend on monthly debt payments compared to how much money you have coming in. Typically, lenders want to see your DTI ratio below 43%.
• Home appraisal: Before approving your HELOC, the lender will usually require a professional appraisal to confirm your home’s current market value.

Understanding these key requirements can help you feel more prepared. Once you’ve checked those boxes, you’ll be ready to start the application process.

How to apply for a HELOC in 6 steps

The process of applying for a HELOC is similar to applying for any other mortgage loan. Before you dive in, it’s a good idea to get a clear picture of your finances and how much equity you have in your home.

You can start by figuring out your loan-to-value ratio. You can use an online calculator or do it yourself by dividing your current mortgage balance (check your monthly statement or online account) by your home’s appraised value. Then, multiply that number by 100 to get your LTV percentage.

It’s also wise to review your credit report for any red flags and get a sense of your DTI ratio. Both your credit score and DTI ratio will play a significant role in whether a lender approves you and what terms you’re offered.

Once you’ve done a quick financial checkup and things are looking solid, you’ll be ready to move on to the next steps.

1. Find a lender

Comparing rates and terms from multiple lenders will help you find the best available options. As you explore your options, aim for an apples-to-apples comparison by asking lenders specific questions, like:

• What are the fees and monthly payments?
• What credit qualifications are required?
• What interest rates, terms, and loan types are available?
• Do you offer a fixed-rate HELOC?

2. Gather documents and apply

When filling out your application, you’ll also need to provide documents proving your income, such as bank statements, W-2 forms, or recent pay stubs. Ask your lender what they need to process your application. Collecting these documents in advance can streamline the process. While some lenders let you apply online, others may ask you to stop by in person.

3. Get an appraisal

An appraisal estimates your home’s value based on recent sales of similar properties in your area. Since lenders use your home as collateral for a HELOC, the appraisal helps determine how much equity you have – and how much you can borrow.

To get the most accurate value, it’s worth learning about what can hurt a home appraisal so you can avoid common mistakes. Some mishaps may include neglecting basic maintenance, poor landscaping upkeep, and leaving renovations or repairs unfinished.

4. Close on your new line of credit

Once your home is appraised, your lender will let you know if you’ve been approved for a HELOC. They’ll also share key details, such as your credit limit and interest rate.

If you proceed, the next step is to sign your loan documents. You can complete this process online or in person, depending on the lender's preference. You’ll likely have to pay closing costs, which can include attorney fees and title search fees. Some lenders may let you roll these costs into your loan if you’d rather not pay them up front.

5. Start the draw period

The draw period is when you can borrow from your HELOC. Most lenders offer a draw period of 10 years. You can withdraw as much as you need up to your approved limit.

Some lenders may have specific rules, such as a minimum draw amount or maintaining a minimum balance. Others may require an initial withdrawal when the credit line is first established.

Monthly payments during the draw period usually cover interest and may include a small portion of the principal. However, in many cases, those payments won’t be sufficient to fully repay the loan by the end of the term. Some plans only require interest payments during the draw period, which means your principal balance won’t go down at all until repayment begins.

6. Pay back the HELOC

Once your draw period expires, you’ll enter the repayment period and pay back both the principal and the interest. You can no longer take out money from the HELOC. Most plans give you up to 20 years to repay the balance, but the exact terms vary by lender.

If you have a fixed-rate HELOC, your monthly payments will stay the same. However, if you have a variable interest rate (which most do), your payments can fluctuate – and sometimes change as often as monthly.

HELOC vs. home equity loan: What’s the difference?

While a HELOC and a home equity loan seem similar at first glance, there are a few key differences worth considering before deciding what’s right for you.

A HELOC works more like a credit card: You can borrow what you need, when you need it, up to a set limit. This provides you with ongoing access to funds, as well as flexibility over time. A home equity loan provides borrowers with a lump-sum payment after approval, typically at a fixed interest rate. With this kind of rate, your monthly payments might be easier to budget for since they are predictable. However, you won’t have the flexibility to take out extra funds at a later date.

Both loan types use your home as collateral, which means your home is at risk if you default. That’s why it’s so important to borrow only what you know you can afford to pay back.

Should you apply for a HELOC?

Before moving forward with a HELOC – or deciding between a HELOC and a home equity loan – it’s important to weigh the pros and cons. Here are a few questions to help guide your decision:

• Do I have a clear purpose for the funds? Make sure you know how you plan to use the money. Whether it’s for home improvements, consolidating debt, or something else, having a well-defined purpose can help you borrow responsibly.
• Do I meet the basic requirements? Check that you’re in a good position to qualify. If not, it may be worth spending a little more time strengthening your finances.
• How much do I really need to borrow? A HELOC offers flexibility, which can be helpful – but it can also make it easy to borrow more than you intended. Go in with a firm estimate so you only borrow what you need.
• Can I comfortably repay what I borrow? It’s essential to have a repayment plan in place before tapping into your equity. Missing payments could hurt your credit and even put your home at risk.
• Have I explored other options? HELOCs are just one way to access your home’s equity. Home equity loans and cash-out refinances may also be worth considering depending on your goals and financial situation.

The bottom line: Make sure a HELOC is right before applying

Whether you’re planning a kitchen renovation, consolidating high-interest debt, or covering education costs, a HELOC can be a helpful way to borrow your home equity. But it’s not the only option – and it’s important to understand how it works before you apply.

If you’re looking for a more structured borrowing option, a Home Equity Loan from Rocket Mortgage may be worth exploring. You can learn more and start the application process today.