Many homeowners have a first mortgage rate they do not want to give up. A HELOC lets you access your home equity while leaving that first mortgage alone. I’m Scott Swinford, a mortgage loan originator (NMLS# 138422) in Crown Point, Indiana, and I have been a loan officer for more than 20 years. Here is how a HELOC works and what it takes to qualify.
What Is a HELOC?
A HELOC is a line of credit secured by your home. It is a second loan that sits behind your current mortgage. You are approved for a credit limit, you draw money from the line, and you pay interest only on the amount you have drawn.
Homeowners commonly use a HELOC for home improvements, paying off higher-interest debt, education costs, or a large planned expense.
How a HELOC Works
The HELOC program I offer has two phases over a 30-year term:
- Draw period (first 10 years): You can borrow from the line and make interest-only payments on what you owe.
- Repayment period (next 20 years): You can no longer draw. Your payment covers principal and interest until the balance is paid off.
The interest rate is variable. It is tied to the Prime Rate published in the Wall Street Journal, so your rate and your payment can go up or down over time.
Three details to know before you apply:
- The first draw at closing must be at least $50,000.
- You cannot take another draw during the first 90 days after closing.
- After that, each draw must be at least $1,000, up to your credit limit.
How Much Can You Borrow?
The amount depends on your home value, your current mortgage balance, your credit score, and how you use the home. Lenders look at your combined loan-to-value, which is your first mortgage plus the HELOC limit, divided by your home value. Lines range from $50,000 to $500,000.
| Credit Score | Primary Residence | Second Home |
|---|---|---|
| 700 or higher | Up to 90% of home value | Up to 80% of home value |
| 680 to 699 | Up to 80% of home value | Not available |
An Example
Say your home is worth $400,000, you owe $250,000 on your first mortgage, and your credit score is 720. At 90% of your home value, your combined loans can total $360,000. Subtract the $250,000 you owe, and the largest line you could qualify for is $110,000.
With a credit score of 690, the limit is 80% of your home value, or $320,000. That leaves room for a line of up to $70,000.
Who Qualifies?
- Credit score: 680 or higher. See why your mortgage credit score can differ from the one you see online.
- Debt-to-income ratio: 45% or lower. The lender calculates your HELOC payment as if you had drawn the full line, at a rate higher than your starting rate.
- Property: Your primary residence or a second home. Investment properties are not eligible.
- Home value: Smaller lines can sometimes use an automated valuation or a drive-by appraisal. Larger lines need a full appraisal.
HELOC vs. Cash-Out Refinance
| Feature | HELOC | Cash-Out Refinance |
|---|---|---|
| Your first mortgage | Stays in place | Replaced with a new loan |
| Interest rate | Variable | Fixed or adjustable |
| How you get the money | Draw as needed during the draw period | One lump sum at closing |
| Often fits | Owners who want to keep their current first mortgage | Owners who want one loan and one payment |
Veterans have another option. A VA cash-out refinance can reach equity that other loan types cannot. I compare both for you before you decide.
Risks to Understand
- Your home secures the loan. If you do not make the payments, you could lose your home.
- Your rate can rise. A variable rate means your payment can increase when the Prime Rate goes up.
- Your payment changes after year 10. When the draw period ends, the payment includes principal and is higher than the interest-only payment.
Frequently Asked Questions
How much can I borrow with a HELOC?
It depends on your home value, your mortgage balance, and your credit score. The program I offer allows a combined loan amount of up to 90% of your home value on a primary residence with a credit score of 700 or higher. Lines range from $50,000 to $500,000.
What credit score do I need for a HELOC?
The program I offer starts at a 680 credit score. A score of 700 or higher allows you to borrow against more of your home value. Your debt-to-income ratio also matters, and the program limit is 45%.
Does a HELOC replace my current mortgage?
No. A HELOC is a second loan that sits behind your current mortgage. Your first mortgage, its rate, and its payment stay the same. You make a separate payment on the HELOC.
Can I get a HELOC on a rental or investment property?
Not with the program I offer. It is available on primary residences and second homes. Investment properties are not eligible.
Find Out How Much Equity You Can Use
I work with homeowners in Indiana, Illinois, and Michigan. Call 219-695-0369 or text me at 219-758-8072, send me a message, or schedule a consultation.
Examples are for illustration only and are not a commitment to lend. Program terms, rates, and availability can change and vary by state. Approval depends on credit, income, property, and program guidelines.
