What Is A HELOC?

As a homeowner, you’re accumulating borrowing power. So, as your home’s equity grows, your financial freedom does, too. A home equity line of credit, or HELOC, gives you a revolving creditline for large expenses. These funds could be used for home improvement projects or remodels, consolidating high-interest debt, such as educational loans, or even for an upcoming vacation. Learn how a HELOC can work for you.

How to Qualify

A HELOC application will vary from financial institution to financial institution, but what you need to qualify really boils down to:

  • Credit score history
  • Debt-to-income ratio
  • Available equity in your home

Much like the process when you bought your home, lenders will look at your employment history, credit score history, and other “proof” they need to ensure you have a stable income to take on a line of credit. From there, they’ll determine if you can afford a HELOC based on your debt-to-income ratio. Your debt-to-income ratio is determined by the total of all your monthly debt expenses by your income. This provides the percentage of how much debt you can handle based on your income.

After that, your lender will help determine the available equity available in your home. Your home’s equity is calculated by the amount you still have on the home must be less than the value of the home.

For example, if your home’s value is worth $185,000 and you only owe $110,000, then you have up to $75,000 of equity available.

As long as the numbers line up, then you’ll have a line of credit available to you!


HELOCs are best used for financing home improvement projects and consolidating debt. If you’re using HELOC for other situations, consider these disadvantages:

Upfront costs. When applying for a HELOC, you may incur fees such as an application fee, title search, home appraisal, and real estate attorney fees. If you can’t afford the costs upfront, then work to get your finances in order.

Borrowing little. Don’t need to borrow much money? Then maybe a HELOC isn’t for you; instead consider a low-interest credit card to help make purchases for smaller projects, vacations, etc.

Variable interest rates. HELOCs have variable interest rates that can change from month to month. If you can barely afford the current interest rate, ask yourself what happens if it increases? Instead of taking the risk, err on the side of caution and consider an alternative.

Alternatives to HELOC

This isn’t the only way to get a creditline for your house projects. So if you’re worried about the variable interest rate, or don’t need to borrow as much, consider a home equity loan or home improvement loan.

  • A home equity loan has a similar concept as a HELOC but is borrowing a lump sum with a fixed rate and term. Learn more.
  • A home improvement loan is reserved to finance home projects or repairs. These funds aren’t used to cover the cost of a vacation or consolidate high-interest debt. Learn more.

Choose the best creditline for your situation. To apply for a HELOC, contact your local financial institution.