Borrowing against your home
Is a HELOC right for you? Seven questions to settle first
Owning a home for a few years often leaves you with equity you could tap. A home equity line of credit is one way to do that, and for some households it fits well. For others it adds risk they don't need. Working through the questions below should tell you which group you are in.
Key takeaways
- Start with the purpose: a revolving line suits spending that arrives in stages.
- Check your equity and your monthly budget before you look at any lender.
- Plan for the rate to move and for the bill to grow once repayment begins.
- Get every charge in writing, and remember you can back out shortly after signing.
In this guide
1. What is the money for?2. How much equity do you really have?3. Can your monthly budget take the payment, at its worst?4. Are you comfortable with a rate that moves?5. What happens when the borrowing period ends?6. What will it cost apart from interest?7. Would something else do the job better?The risks in plain termsIf you change your mind1. What is the money for?
The use you have in mind matters more than anything else on this page. A line of credit lets you take money out in pieces over several years and put it back again, so it tends to suit costs that come in waves: a renovation paid contractor by contractor, tuition billed each term, or a cushion for repairs you can't predict yet.
If you need one known amount on one day, a product that pays out a single sum may be simpler. And if the plan is to cover everyday bills, think hard first: turning short-term spending into debt tied to your house rarely ends well.
2. How much equity do you really have?
Start with a realistic figure for what your home would sell for today, not the peak price you saw online. From that, take away the balance on your first mortgage and any other loan the house secures. What remains is your equity.
A worked figure. Suppose a house would fetch about $300,000 and the mortgage balance is $150,000.
Many lenders cap total borrowing against a home at roughly 80 to 90 percent of its value. At 85 percent, that cap is $255,000, which leaves room for a line of up to about $105,000.
The sum is here to show the method, nothing more. They aren't a quote, and a lender's own appraisal, policies and review of your finances decide the actual limit.
3. Can your monthly budget take the payment, at its worst?
Lenders will look at your income and existing debts, but the more useful test is your own. Write down what you would owe each month if you drew the full amount you expect to use, and then imagine the rate two or three points higher.
If that higher figure would leave you short in a normal month, the line is probably too large, or the timing is wrong. A cushion of savings beside the line makes a bad month far less dangerous.
4. Are you comfortable with a rate that moves?
Most of these lines carry an adjustable rate. Lenders take a public benchmark, very often the prime rate, and add their own fixed markup. When the benchmark changes, so does what you pay.
- Introductory pricing. An unusually low opening rate is common. Find out exactly when it stops and what replaces it.
- Caps. The agreement must state the highest rate the line can ever reach. Some also limit each individual increase.
- Fixed-rate options. Certain lenders let you convert part of what you owe to a fixed rate, sometimes for a fee.
5. What happens when the borrowing period ends?
These lines usually have an early period, often about ten years, when you can take money out. Some lenders only ask for interest during that time. After it closes, the balance is paid off over a set number of years, with principal and interest in every payment.
That switch is where many borrowers get surprised, because the bill can rise sharply overnight. A small number of agreements instead ask for everything left in a single final payment. Ask which structure you are signing up for, and run the numbers for the later period before you commit.
6. What will it cost apart from interest?
Two offers with the same rate can cost quite different amounts once the extras are counted. Ask each lender for a written list, and look in particular for:
- Appraisal and title charges.
- Origination, application or recording fees at closing.
- An annual or membership fee for keeping the account open.
- Charges for each withdrawal, or a minimum you must take out.
- A penalty for closing the account in its first years, which sometimes claws back closing costs a lender said it would cover.
7. Would something else do the job better?
A line of credit is not the only way to use the value in your home, and it isn't always the cheapest.
For smaller sums that you can clear quickly, borrowing that isn't tied to your house may carry less risk, even at a higher rate.
The risks in plain terms
- Your house secures the debt. Falling behind can lead to foreclosure, the same as with a mortgage.
- Payments can rise. A higher benchmark rate or the end of the borrowing period can both lift what you owe each month.
- Access can be reduced. A lender may lower or suspend the limit if property values fall or your circumstances change.
- Selling means settling up. Any balance is normally repaid from the sale proceeds when you move.
If you change your mind
For a line secured by the home you live in, federal rules usually give you until midnight of the third business day after signing to cancel, with no penalty and the return of the fees you paid. The lender must explain this in writing at closing.
No reputable lender should rush you. Gather more than one quote, read the agreement in full, and borrow only an amount you know you can repay.
A note on this page. Dorset Point wrote this as a general explainer on borrowing against home equity. We are not ranking lenders or pointing you to one, and nothing here is a credit offer. Every lender sets its own terms. You can see who we are on our About page.