A HELOC allows you to borrow against your home’s equity. You can borrow up to 85% of the value of your home, minus what you still owe on your mortgage.

The qualifications for a HELOC are your creditworthiness, the value of your home and your debt-to-income ratio. You may also be required to provide proof of income.

Low or No Closing Costs

Lenders can vary in the fees they charge to open and maintain a HELOC. They may waive certain closing costs, like those charged to verify your identity and get a copy of your credit report, or wrap them into the loan amount, such as the fee that pays for a real estate appraisal.

They also charge a number of other, ongoing fees, like annual interest fees, transaction fees and inactivity fees. These can add up over time and impact your financial planning.

Typically, lenders consider your debt-to-income ratio, income, employment history and credit profile to approve you for a home equity line of credit. A lender will usually require a minimum combined loan-to-value (CLTV) of 85 percent, a credit score of 620 or higher and a debt-to-income ratio below 43 percent. Lenders will also arrange a title search to make sure there are no liens on your property. You have three business days to cancel financing after signing the loan documents and receiving two copies of a Truth in Lending disclosure.

Variable Interest Rates

Interest rates on HELOCs are typically variable, which means they can change over the life of the loan. During the draw period, you can borrow money as needed and are required to make only interest payments, whereas in the repayment period you start paying back principal and interest.

The interest rate is based on an index plus a margin set by the lender. The index can change based on economic factors, and the rate will rise or fall as the economy changes.

Some lenders offer fixed-rate HELOCs, which are ideal for borrowers who want to budget for predictable monthly principal and interest payments. However, the lender may require a minimum outstanding balance for a fixed-rate loan option to be available. Some lenders also charge a fee for a fixed-rate loan option. They might also limit the number of times you can switch between a variable and fixed-rate HELOC. The maximum amount you can borrow under a fixed-rate loan option is generally lower than the credit line’s current limits.

Repayment Periods

A HELOC has two phases: a draw period and a repayment period. During the draw period, you can borrow funds from the lender using special checks or a credit card that’s connected to your account. You pay only interest on the money you use during this time, which lasts about 10 years.

After the draw period ends, your balance will enter a repayment period, during which you can’t borrow anymore and your monthly payments will include both principal and interest. You should make sure you have a plan for how you’ll repay the debt once this period begins.

Many homeowners use their HELOC for home improvement projects or to pay off high-interest debts like credit cards. If you’re considering a HELOC, find out how long your repayment period will be before entering a contract. It could help you decide whether it’s right for you or not. It can also help you budget for an increase in your monthly payments.

Fees

Many HELOCs come with recurring fees like annual charges and minimum withdrawal fees that can impact the overall cost of borrowing. To minimize these costs, it’s wise to shop around and compare lenders.

Home equity lines of credit allow homeowners to access their equity in the form of a revolving line of credit for up to 10 years. HELOCs can also be used to pay off debt from other sources with higher interest rates, including credit cards and student loans.

There are a few standard fees associated with HELOCs, such as credit report fees, attorney/document preparation fees and recording fees. However, these fees can be avoided by shopping around for the best rates and avoiding teaser rates that expire after a certain period. Some lenders also charge a fee to convert the variable rate to a fixed rate. This fee is typically around $200. Other fees may include fees to satisfy a prior lien and property insurance requirements.