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

A home equity line of credit (HELOC) gives homeowners with built-up equity a flexible way to access funds for major expenses – from renovations and tuition to debt consolidation. While Rocket Mortgage doesn't currently offer HELOCs, understanding the application process and requirements can help you decide if this financing option fits with your financial goals. This guide breaks down the 6 essential steps to apply for a HELOC, along with the costs, eligibility requirements, and key pros and cons.

Key takeaways:

• A home equity line of credit lets you turn some of the equity you’ve built in your home into cash you can use for other purposes.
• HELOCs are a type of loan, so you’ll have a new monthly loan payment to make.
• To qualify, you need sufficient equity in your home, solid credit, and the means to repay the debt.

What is a HELOC?

A home equity line of credit is a second mortgage, like a home equity loan¹, but uses your home as collateral for a line of credit rather than a lump sum loan.

You can draw on this line of credit up to your limit as needed during your HELOC's draw period, which usually lasts about 10 years. You usually can access your HELOC with a card, checks, or online transfers. After the draw period, you can no longer draw on the line of credit and make payments until you pay off the balance.

You’ll only pay interest on the amount you spend, not the full amount you’re approved for.

Most HELOCs have a variable mortgage 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.

HELOC requirements

To qualify for a HELOC, you’ll need two things: sufficient equity in your home and the ability to make monthly payments on the loan. Each lender may have different standards, but these are the things most will examine.

Credit score and payment history

The first thing that any lender will look at when you apply for a loan is your credit score. Since a HELOC is a type of second mortgage the credit score required may be different than the credit score needed to buy a house. The better your credit score, the more likely it is that a lender will approve your application and the better your interest rate will be. Most lenders require a score of 680 or so, but some may be willing to go lower if you have sufficient home equity or income.

Home equity and LTV

HELOCs are secured by your home equity, which is the value of your home minus the amount you owe on your mortgage. For example, if you have a home worth $500,000 and a mortgage with a balance of $300,000, your equity is $200,000.

Most lenders will approve loans that will leave you with somewhere between 15% and 20% equity in your home. Another way to measure this is loan-to-value ratio, which is the percentage of your home’s value that you’re borrowing against. In the above example, your loan-to-value ratio (LTV) is $300,000 / $500,000 = 40%.

That means if your lender is willing to let you borrow up to an 80% LTV ratio, you could get a HELOC for a maximum of $100,000.

DTI and income

When you get a loan, you’ll need to be able to show the lender that you can afford the monthly payments. Lenders will usually look at two things to make sure you have the cash to make payments.

The first is your income. For an extreme example, if you only make $1,500 per month, you simply don’t earn enough to make a $1,600 HELOC payment.

The second is your debt-to-income ratio (DTI), which is the percentage of your monthly income that goes toward debt payments. To calculate your DTI, you divide the amount of your income that is used toward debt payments by how much you make per month. For example, if you make $5,000 per month and have a $1,000 mortgage bill and $400 student loan bill, your DTI ratio is $1,400 / $5,000 = 28%.

Lenders prefer lower DTI ratios and usually won’t let you get a loan that pushes your DTI over 43% or so.

Documents lenders may request

Lenders won’t just take you at your word when they ask for details about your home, credit, and finances. You’ll usually have to provide documentation to the lender proving the things that you state. Just like when you applied for a mortgage, your lender may have a checklist of documents needed for preapproval.

Be ready to provide documents such as:

• Proof of identity, such as a driver’s license
• Proof of income, such as pay stubs
• Proof of homeowners insurance
• Proof of assets, such as bank and investment statements

What can disqualify you for a HELOC

The most basic thing that will disqualify you from getting a HELOC is not having sufficient equity in your home. If there isn’t any equity to secure the loan, a lender won’t be willing to give you a HELOC.

Having poor credit, little or no income, or a high DTI ratio will also leave you struggling to find a willing lender.

What to do before you apply for a HELOC

Before you apply for a HELOC, it’s important to make sure you’re prepared. Follow these steps.

Estimate your home equity

The first thing to do is to estimate your home equity so you can get a sense of how much you’ll be able to borrow. There’s no point in getting a HELOC if you can’t borrow enough to meet your financial need.

To do this, calculate your LTV ratio. Divide your current mortgage balance (found on your most recent mortgage statement) by your home’s current appraised value. Then, multiply by 100 to get the percentage. If you don’t know its appraised value, check with your local tax assessor’s office.

So, if you owe $300,000 on your mortgage and your home is worth $500,000, the LTV calculation would look like this:

$300,0000 / $500,000 x 100 = 60%

Most lenders will let you borrow up to an LTV of 80%, so in this example you could borrow a maximum of $100,000.

Some lenders allow higher LTV limits for borrowers with strong creditworthiness. This is one reason to check your credit and address any negative factors or errors before applying.

You also can use the home equity calculator from Rocket Mortgage to determine how much equity you have.

Keep in mind that this is a rough estimate because home prices rise and fall constantly and tax appraisals may not match market values. You may have more or less equity depending on how the real estate market in your area has fared recently.

Compare HELOC rates, fees, and lenders

Next, take the time to shop around, comparing different lenders, the rates they offer, and the fees they charge. It’s in your best interest to check with multiple lenders to get the best deal.

Even a small difference in rate can make a big difference in the amount you pay over the life of a HELOC. If you get a $100,000 HELOC that comes with a 10-year repayment period, you’d pay $1,110.21 if the loan has a 6% interest rate and $1,060.66 if the loan has a 5% interest rate. That would save you nearly $6,000 in interest over the life of the loan.

Consider prequalification

Once you’ve found a few options, ask if they offer prequalification. To prequalify, you’ll offer some basic details about your credit and finances, and the lender will use that to determine if you’re likely to qualify for a loan and what terms you can expect.

This is a much less thorough process than actual underwriting but can give you a sense of the type of loan each lender will offer and give you a chance to ask each lender about their loan features.

How to apply for a HELOC in 6 steps

Once you’re ready to apply for a HELOC, follow these steps.

1. Prequalify and find a lender

Just like when you’re looking for the best deal on a car or plane ticket, shopping for a HELOC is vital. Different lenders offer different terms and rates. A key thing that varies is that some lenders offer interest-only payments during the draw period, which means you pay nothing toward the principal.

An important question is whether the HELOC has a balloon payment. This means that the lender may require a large lump-sum payment at the end of your loan term. This can be difficult to afford if you’re not prepared.

Also ask your mortgage lender about fees, the monthly payment amount, interest rates, loan types (such as adjustable versus fixed-rate loans), and potential credit qualifications. 

2. Gather documents and apply

It’s best to gather your financial documents before submitting your HELOC application to avoid delays. You usually will need to provide proof of income documents, such as bank statements, W-2 forms, recent pay stubs, and income tax returns.

When you apply, you’ll usually do so online or in-person at a bank. Online applications offer convenience because you don’t have to leave home.

3. Go through underwriting and get an appraisal

After you apply, the lender will examine your application as well as your credit history. This is called the underwriting process. If the lender determines you’re likely to pay back your loan, it will approve your application and move on to an appraisal of your home.

An appraisal provides the most accurate estimate of your home's fair market value. Professional appraisals use recent sales of comparable nearby properties – usually called comps – and consider your home’s specific features. Don’t forget to make your home look as good as you can on appraisal day. Poor upkeep, clutter, disrepair, unkempt lawns, unfinished renovations, and other negatives can affect your home appraisal.

4. Review your terms and close on your new line of credit

Following the appraisal, which the lender will see, the lender will tell you how much you qualify for, the interest rate they’re offering, and other important terms.

If you accept the terms, you’ll sign the paperwork – sometimes online, sometimes in-person – and receive your HELOC. You should expect to pay closing costs on your line of credit. Some lenders allow these fees to be rolled into the loan amount.

5. Start the draw period

The draw period is when you can borrow from your HELOC. Most lenders offer a 10-year draw period. You can withdraw up to your approved limit.

Some lenders have a minimum draw amount or require you to maintain a minimum balance. Others may require an initial withdrawal when the credit line is opened.

Monthly payments during the draw period usually cover interest and may include a small principal payment. 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 the draw period ends, you’ll enter the repayment period, which could be up to 20 years. You can no longer borrow funds from your HELOC. This time is specifically for repayment.

If you have a fixed-rate HELOC, your monthly payment will remain the same. If you have an adjustable-rate HELOC, your payments may fluctuate as your interest rate adjusts. Your HELOC may have rate caps that limit how much your rate can adjust. These will be explained in your loan documents and should be checked and understood before signing.

HELOC vs. home equity loan vs. cash-out refinance

HELOCs are just one way to turn your home equity into cash you can use for other purposes. There are other options you can consider.

The main difference between HELOCs and other ways to tap your home equity is that HELOCs give you access to a line of credit that you can draw from on an as-needed basis multiple times. Other options give you a lump sum of cash that may be a better fit for one-time expenses.

We’ll break down how HELOCs compare to home equity loans and cash-out refinancing².

HELOC vs. home equity loan

A home equity loan is a type of second mortgage that lets you turn your home equity into cash. When you receive a home equity loan, you get a lump sum of cash that you can use for other purposes. Typically, these loans have fixed interest rates and payment.

By comparison, HELOCs give you a line of credit you can draw from many times. HELOCs typically have variable rates, and payments can change based on how much you draw from a HELOC and as rates adjust.

Home equity loans tend to be a better fit for people who have a larger, one-time expense they want to cover, such as debt consolidation. HELOCs are a better fit if you need flexible access to cash.

HELOC vs. cash-out refinance

A cash-out refinance lets you refinance your entire mortgage with a new loan for a larger amount. You replace your previous mortgage payment with the new loan’s payment and can pocket the difference in the loan amounts as cash, giving you money to use for other purposes.

For example, if you have a mortgage with a $250,000 balance, you could get a cash-out refinance for $300,000 if you have enough equity in your home and you meet a lender’s qualifications. This loan would replace your previous loan and give you $50,000 you can use for other purposes.

A cash-out refinance can make sense when interest rates have fallen or you’d like to extend your loan term. When comparing a cash-out refinance to a HELOC, consider the long-term costs, how you plan to use the money, and your financial goals among other things.

Just keep in mind that cash-out refinancing increases the amount you owe on your mortgage, so it’ll typically take longer to pay off your home if you get a cash-out refinance.

Should you apply for a HELOC?

Here are a few questions to consider before getting a home equity line of credit:

• 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 some time strengthening your finances.
• How much do I really need to borrow? A HELOC's flexibility can be helpful, but it also can 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 be sure you can afford a HELOC. Missing payments could hurt your credit and put your home at risk.
• Have I explored other options? A home equity loan or a cash-out refinance is also worth considering, depending on your goals and financial situation.

FAQ

Before applying for a HELOC, keep these questions in mind.

How difficult is it to qualify for a HELOC?

Qualifying for a HELOC isn’t necessarily hard, but you’ll have to meet a few eligibility requirements. On top of having sufficient equity, you’ll need solid credit, sufficient income, and a low DTI ratio.

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

How much you pay each month for a $50,000 HELOC depends on whether you’re in the draw period, where you only pay interest, or the repayment period, where you pay both principal and interest. The interest rate also impacts the cost.

On a $50,000 HELOC at 6% interest with a draw period of five years, you’d pay $250 per month during the draw period. If the repayment period is 10 years, your payment would be $555.10 per month during the repayment period.

What disqualifies you for a HELOC?

You cannot get a HELOC if you don’t have sufficient equity in your home. You may also struggle to qualify if you can’t show sufficient income to make payments, have poor credit, or have too high a DTI ratio.      

Do you need a professional appraisal for a HELOC?

Yes, your lender will usually order a professional appraisal when you apply for a HELOC to get a full understanding of the home’s value and how much equity you have.

Can you apply for a HELOC online?

Yes, many lenders offer an option to apply for a HELOC online. Other lenders require in-person or phone-based applications.

Does a HELOC affect your credit score?

Yes, like any loan a HELOC will impact your credit score. If you make your monthly payments on time, you can improve your credit score while missing payments can damage your credit.

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

A HELOC can offer flexibility by allowing you to tap into your home equity when you need it, up to your approved limit. If you decide this option works for you, take time to compare lender options for competitive terms. Once approved, you'll enter a draw period where you can withdraw funds as needed, followed by a repayment phase where you'll pay back what you've borrowed. Though most HELOCs feature variable interest rates that can fluctuate over time, fixed-rate HELOCs are also available from many lenders if you prefer payment stability.

While Rocket Mortgage currently doesn't offer HELOCs, we are here to help you explore all your borrowing options.

¹Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.

²Refinancing may increase finance charges over the life of the loan.