applying for a home equity line of credit: what to know

A beginner’s guide to understanding the home equity line of credit process

If you want a little extra money to pay for life’s expected (and unexpected) needs, but are unsure about committing to a personal loan, your house may have a line for you.

A home equity line of credit, or HELOC, is a pre-approved line of credit that’s based on a home’s equity, essentially turning a percentage of its value into accessible cash. When drawn from, the money can be used to pay for whatever the homeowner may need – a wedding, debt consolidation, home improvements, or medical bills.

Some homeowners may confuse HELOCs with home equity loans, but they’re different. A home equity loan converts a home’s equity (the amount of your home that’s been paid off) into a fixed sum of cash, delivered in one lump sum that the homeowner borrows and must pay back. With a HELOC, the money is put in a reserve and isn’t due unless the homeowner taps into it.¹

Until then, the money sits securely. And that security line can be substantial: The average homeowner holds close to $185,000 in home equity.²

The HELOC process for beginners

Once approved, a HELOC is structured in two stages.

The first is when the borrower can pull from the line of credit – the withdrawal period. During this time, usually 10 years, the only payments due will be interest based on the current balance. The second stage is called the payment period, when the principal is added. This can be, say, 20 years.³ (We offer an easy way to estimate payments here.)

Once you’ve figured out how much money you want to put in the HELOC, here are 7 steps you can expect from the application process.

1. A credit check:

Even if you’re up-to-date on mortgage payments, your lender will check your credit score. So it pays to review it in advance, both to ensure it’s what you expect and to catch any potential errors. Also, increased credit card debt may cause your score to dip (typically, a HELOC requires a score of at least 660).⁴ You can request a free credit report at AnnualCreditReport.com.

2. A little rating of your own.

HELOC terms can vary. A lender may wave upfront fees in exchange for a higher interest rate, for example. In mid-April, the average HELOC rate was close to 8%,^{5, 6} while First Financial offers promotional rates as low as 6.99% for the first 6 months, without closing fees.* Your credit score, home equity, and the debt-to-income ratio (monthly debt divided by income) will factor in. Many HELOCs require a maximum debt-to-income ratio of 43%.⁷

3. There will be a request for financial documents.

Remember all of those records you pulled together for your original mortgage? The same types of documents will be needed for a HELOC. Be prepared with employer information, income documents (W-2s and/or 1099s), investment records, bank statements, proof of home ownership, and mortgage payments.⁸

4. There could be a home appraisal.

Because you’re using your home as collateral, the lender will probably have the property appraised to determine its market value. The estimate will help the lender calculate your equity, or ownership stake in the property, and set the HELOC amount.

5. The sit-tight period.

A HELOC approval can take a few days or several weeks. During this time, in addition to the home appraisal, your finances and creditworthiness will undergo a review by an underwriter. If anything looks off, you’ll likely be asked to provide additional documentation and clarification.⁹

6. The happy-decisions period.

Once approved, you’ll be able to access your HELOC in a number of ways: checkbook, electronic transfers, in-branch withdrawals, or all of the above. You can then use your “house money” for unexpected as well as planned needs, such as starting a new business or advancing your education. For more ideas, check out our blog on how you can use a HELOC, here.

A HELOC can be your shelter's shelter

An added bonus of applying for a HELOC is that the process of securing one puts your financial position and needs into perspective. Once in place, the HELOC can provide peace of mind if you’re planning a family, or it can provide literal shelter if the roof over your head needs replacing.

The process is just a matter of steps. We’re here to help.

To learn more about HELOCs, compare loan options, and even apply online, click here.