A HELOC is a home equity line of credit secured by your home. A traditional HELOC allows you to borrow funds as you need then pay back the money at a fixed or variable interest rate. A common loan term for a HELOC is 30 years comprising a 10-year draw period and a 20-year repayment window. But you can take out a HELOC for a shorter time from as little as five years.

HELOCs appeal to homeowners because they often have lower interest rates compared to common unsecured borrowing alternatives like credit cards and personal loans. (1) Depending on what you use the funds for, interest on these loans could be tax-deductible too. (2)

Who needs a HELOC?

HELOCs tend to work well for people who are:

  • Expecting long-term ongoing expenses, but are unsure of exactly how much they’ll need and when. Much like a credit card, as you repay your outstanding balance during the draw period of your HELOC, the amount of available credit gets restored. This enables you to borrow whenever you need to up to your approved limit — without the need to reapply for loans over and over.
  • Looking to finance home renovation. Whether you’re planning to remodel the kitchen or update the bathroom, estimating the cost of a home improvement project is notoriously difficult, making it a challenge to take out an installment loan for a specific amount. But this is where the flexibility of HELOCs comes in handy: say you expect a kitchen remodel to cost between $30,000 to $45,000 — you can apply for a HELOC with a limit of $45,000 and gradually take withdrawals as work progresses. If the final bill is $35,000, you’ll have $10,000 in untapped credit and pay interest only on the $35,000 you borrowed. An extra financial incentive is that interest on home equity borrowing could be tax-deductible for money used to buy, build, or substantially improve properties.
  • Finding it difficult to save for a rainy day fund. A  line of credit offers peace of mind that a large sum of money can be accessed quickly in case of an emergency or unexpected expenses. Of course, dipping into savings for unforeseen events is very different from taking out debt. But without a HELOC, borrowers may have to resort to higher-interest debt like personal loans and credit cards.
  • Financially disciplined enough to resist unplanned non-emergency expenses. With a line of credit on hand ready to use, borrowers will need to decide from the outset when the HELOC should be used and stick with their plan — otherwise, they risk overspending and compounding their debt burden.

What can you use a HELOC for?

Apart from home improvement projects, HELOCs are ideal for:

  • Large unexpected expenses. This might include medical bills, motor repairs, and home repairs.
  • Major life changes. Getting married or divorced and losing your job are examples of life events that can significantly impact your finances.
  • Consolidating higher interest rate debt. The average HELOC rate is less than 5%, but personal loan rates range from around 10% to 28% while average credit card interest rates hover around 20%. It’s easy to see how you can use a HELOC to swap a high-interest debt for a low-interest loan and get out of debt faster by saving tons on interest. Reduced interest charges will offer some breathing space for those feeling financially stretched by high monthly repayments too.
  • Kids’ education costs. Even if you qualify for federal aid, the annual borrowing limits on direct loans means you’re likely to be left with a funding gap. You could fill this gap with a federal Parent PLUS loan, but the interest rate charged on these loans are likely to be higher than a HELOC rate since the latter is backed by collateral.
  • Starting up a business. Traditional business loans are hard to get. If you tap home equity, lenders are less likely to be concerned about your business plan as they’ll focus more on your personal resources.

In circumstances where you know exactly how much you need to borrow, getting a home equity loan — an installment loan with a one-time disbursement with a fixed interest rate — could be a good option, particularly if you know exactly how much you’ll need and prefer the predictability of a fixed repayment schedule.

How do you get a HELOC?

Lenders will generally assess the following when making their credit decision:

  • Your credit score and credit history
  • The amount of equity in your home
  • Your employment history
  • Your monthly income and debts

To be approved for the best rates, you'll need a high credit score, low debt-to-income ratio, and equity in your home. You’re not restricted to applying for a HELOC with your current mortgage lender, so it makes sense to shop around for the best deal.

How do you calculate home equity?

The amount of equity you have in your home is calculated by subtracting the total outstanding debts secured by your home from its current market value. For example, if your home is worth $500,000 and your mortgage balance is $100,000, then the value of your equity is $400,000.

When you apply for a HELOC, your combined loan-to-value ratio, or CLTV, is also important. This measure tells lenders how much of the value of your home will be secured by debt if the line of credit you’re seeking is approved.

Continuing from our previous example, if you’re seeking a HELOC of $75,000, then the total amount of loans secured against your home will be $175,000. With a current appraised value of $500,000, your CLTV is 35%. Many lenders require your CLTV to be under 85%.

How can you increase your home equity?

There are two ways to boost your home equity. The first is to make bigger mortgage repayments — more than the minimum requirement — to chip away at the loan balance quicker. The second is to make home improvements and ensure it’s well maintained.

However, it’s important to remember that home equity is significantly influenced by the current market value of your home. Some factors that affect house prices are beyond your control, meaning your equity may stay the same or drop when house prices fall — even if you have taken steps to increase it.

How a HELOC from Figure works

Because Figure is powered by blockchain, a technology that eliminates the need for financial intermediaries and their costly fees, Figure offers faster and more efficient loan products. Unlike other lenders, you won’t be charged fees for account opening, maintenance, or prepayments. In fact, Figure only charges an origination fee for the cost of providing your loan. (5)

Figure’s application is 100% online and takes five minutes to complete. By fast-tracking the loan process with an Automated Valuation Model for property appraisal, funding can be initiated in as little as five days (6) — much quicker than the two to four weeks typically required with other lenders.

These articles and resources are not intended to be financial advice. They are for educational purposes only, and financial decisions should be based on specific financial needs, goals and risk appetite.

Figure Lending LLC dba Figure | NMLS #1717824 - For licensing information, go to www.NMLSCONSUMERACCESS.ORG. Equal Housing Opportunity

Figure Home Equity Line is available in AK, AL, AR, AZ, CA, CO, CT, DC, FL, GA, IA, ID, IL, IN, KS, LA, MA, ME, MI, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NM, NV, OH, OK, OR, PA, RI, SD, TN, VA, VT, WA, WI, WY with more states to come.

1 A home equity line of credit requires that you pledge your home as collateral, and you could lose your home if you fail to repay.

2 You should consult a tax advisor regarding the deductibility of interest and charges to your HELOC.

3 The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.

4 The advertised APR includes a combined discount of 0.75% for opting into a credit union membership (0.50%) and enrolling in autopay (0.25%), as well as the payment of an origination fee in exchange for a reduced interest rate, which is not available in all states. Our APRs can be as low as 4.00% for the most qualified applicants and those who also select five year loan terms, depending on credit profile and the state where the property is located; APRs will be higher for other applicants and those who select longer loan terms. For example, for a borrower with a CLTV of 45% and a credit score of 800 who is eligible for and chooses to pay a 4.99% origination fee in exchange for a reduced APR, a five-year Figure Home Equity Line with an initial draw amount of $50,000 would have a fixed annual percentage rate (APR) of 4.00%. The total loan amount would be $52,495. Alternatively, a borrower with the same credit profile who pays a 3% origination fee would have an APR of 5.00% and a total loan amount of $51,500. Your actual rate will depend on many factors such as your credit, combined loan to value ratio, loan term, occupancy status, and whether you are eligible for and choose to pay an origination fee in exchange for a lower rate. APRs for home equity lines of credit do not include costs other than interest. Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone.

5 You will be responsible for an origination fee of up to 4.99% of your initial draw, depending on the state in which your property is located and your credit profile. You may also be responsible for paying recording fees, which vary by county, as well as a subordination fee if you ever ask Figure to voluntarily change lien position.

6 Approval may be granted in five minutes but is ultimately subject to verification of income and employment. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing. In addition, funding timelines may be longer if we cannot readily verify that your property is in at least average condition with no adverse external factors with a property condition report and need to order a desktop appraisal to confirm the value of your property.