A HELOC is a line of credit borrowed against the available equity of your home. Your home's equity is the difference between the appraised value of your home and your current mortgage balance. Through Bank of America, you can generally borrow up to 85% of the value of your home minus the amount you still owe.
Most will allow you to tap 80% of your home equity but some lenders might be ok with up to 90% with a higher interest rate. The lender subtracts how much you still owe on your first mortgage from the appraised value of your home. The difference—the LTV—establishes how much you can get with a HELOC.
HELOCs come with variable interest rates, which change based on the prime rate, in turn tied to Federal Reserve policy.
To qualify for a HELOC, you must have equity in your home and maintain a low debt-to-income (DTI) ratio. You will also need a good credit score and proof of income. The amount you can borrow with a HELOC depends on the value of your home and the amount of equity you have built up.
Loan payment example: on a $50,000 loan for 120 months at 8.40% interest rate, monthly payments would be $617.26. Payment example does not include amounts for taxes and insurance premiums.
Example 2: 20-year fixed-rate home equity loan at 8.85%
So, for a 20-year, $100,000 home equity loan, you could expect a slightly higher rate than on a 10-year term. In this case, let's say you qualified for an 8.85% rate. This would result in a monthly payment of $890 — much lower than the payment on a 10-year term.
Example 1: 10-year fixed-rate home equity loan at 9.09% interest. The average interest rate for a 10-year fixed-rate home equity loan is currently 9.09%. If you borrowed $100,000 with that rate and term, you'd pay a total of $52,596.04 in interest. Your monthly payment would be $1,271.63.
Past Bankruptcy or Foreclosure
Having a bankruptcy or foreclosure on your short- to mid-term credit history will likely make it difficult to qualify for all types of loans, including HELOCs. These marks against your creditworthiness are not permanent, but they also don't vanish overnight.
In October of 2023, Bankrate data showed rates were averaging 8.75 percent on home equity loans and 9 percent for HELOCs. There is one bright spot, though: If you use a HELOC or home equity loan for housing-related repairs or remodels, the interest can be tax-deductible. That can reduce the real cost of your financing.
Now let's calculate the monthly payments on a 15-year fixed-rate home equity loan for $20,000 at 8.89%, which was the average rate for 15-year home equity loans as of October 16, 2023. Using the formula above, the monthly principal and interest payments for this loan option would be $201.55.
Lower interest rates
While home-loan interest rates overall have risen dramatically since 2022, HELOC rates still tend to be lower than those on credit cards and personal loans. If you qualify for the best rates, a HELOC can be a less expensive way to consolidate debt or finance a home renovation.
Home equity loan and home equity line of credit (HELOC) closing costs can range from 2% to 5% of your loan amount. According to a recent LendingTree study, the average homeowner borrowed just over $83,000 with a home equity loan, which would equate to $1,600 to $4,000 in closing costs.
Here are some general HELOC requirements:
Proof of income and employment. A new appraisal to determine the current value of your home. Up to 85% Loan-to-Value (LTV).
Much like a credit card, a HELOC is a revolving credit line that you pay down, and you only pay interest on the portion of the line you use. as well as discounts based on the funds you initially use when opening the HELOC.
While having an unused HELOC can be advantageous in many ways, it's essential to be aware of the potential costs. Some HELOCs come with annual fees or maintenance fees, which you might still have to pay even if you don't use the credit line. The fees you could incur, even with an unused HELOC, include: Inactivity fees.
If you've taken out a home equity loan (or home equity line of credit), you can still sell your house. In this case, you can use the money you receive for the sale to repay the home equity loan, and you won't have to make any further payments.
If the value of your home drops significantly, your lender may decrease your HELOC limit to reflect the reduced equity or freeze your HELOC account altogether. A housing market crash may also cause you to default on your HELOC if you owe more on your home than it's worth.
Having a HELOC could increase your debt-to-income ratio, making it more difficult to be approved for other loans or credit.
Lenders would perceive you as a credit risk and possibly decline your loan application if you have a low credit score. In addition to having a good credit score, you should have a debt-to-income (DTI) ratio that meets your lender's requirements.
The first step to take after being denied a HELOC or home equity loan is to understand why the lender rejected your application. Lenders typically assess several factors, including your credit score, income, debt-to-income ratio and the amount of equity in your home.
Can you take equity out of your house without refinancing? Yes, there are options other than refinancing to get equity out of your home. These include home equity loans, home equity lines of credit (HELOCs), reverse mortgages, Sale-Leaseback Agreements, and Home Equity Investments.
Example 2: 15-year fixed home equity loan at 9.07%
As of December 21, 2023, the average national rate for a 15-year loan was nearly the same as for a 10-year loan: 9.08%. With that rate and term, you'd pay $764.27 per month for the loan.