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Home equity line of credit(HELOC)

A home equity line of credit is a type of second mortgage that allows homeowners to borrow money against the equity they have in their home and receive that money as a line of credit. Borrowers can use HELOC funds for a variety of purposes, including home improvements, education and the consolidation of high-interest credit card debt.

Qualification Requirements For HELOCs

HELOCs have their disadvantages and advantages, so consider your financial needs for your investment or venture.

These requirements may adjust depending on your lender, but you typically need: 

  • Reliable income: Many lenders will need proof of income to confirm you’ll be able to pay off your loan payments.

  • Good credit: A credit score above the mid-600s will likely approve you for a loan. A credit score above 700 is considered ideal.

  • Qualifying amount of equity in your home: You should have at least 15 – 20% home equity.

  • Responsible payment history: Lenders may evaluate your previous payment history to make sure you haven’t made any late payments in the past.

  • A low debt-to-income ratio (DTI): The lower your DTI, the better. Discuss with your lender what their qualifying DTI ratios are to potentially receive a loan.

Standalone HELOC

This product offers current homeowners a simple way of tapping into their home’s equity when a cash-out refinance doesn’t make sense due to having a low interest rate on their current mortgage. It’s a popular option for accessing cash that can be used to consolidate and pay down debt, make home improvements, cover tuition and more.

Piggyback HELOC

This product allows qualified conventional borrowers to secure a new mortgage on the home while simultaneously opening a home equity line of credit. Doing so allows borrowers with less available for a down payment to borrow additional money that can help them avoid mortgage insurance. It’s also a great option for borrowers with jumbo loan amounts who want to qualify for a conforming loan instead.

Disadvantages And Advantages Of A HELOC Loan

HELOCs can be useful financial tools, but they don’t come without risks. Here are the most important disadvantages and advantages to be aware of before applying for a HELOC loan.


  • Be prepared for the upfront costs. Before receiving a HELOC, you may be required to pay an application fee, for a home appraisal, title search and attorney fees. If you don’t need to borrow a large sum of money, these additional up-front costs may not be worthwhile. If you need help paying off your mortgage, using a credit card may be more ideal for your situation.

  • Your home is used as collateral. Any time you take on a debt, especially one that is tied to your home, there are risks. If you find yourself unable to make payments on your HELOC, you could end up losing your home, since it acts as collateral for the loan.

  • Your rates and payments may increase. You also must watch out for potential rate or payment increases based on market fluctuation. If your rate goes up, or your draw period ends and you must go from making interest-only payments to full payments, your finances could suffer a shock from the increase. Make sure your finances can handle this unpredictability.

  • It’s not always the most practical option. You should also be careful about using a HELOC to pay for everyday expenses. Though it might start to feel like a regular credit card, you’re trading valuable equity for the money you borrow from your HELOC. In general, it’s best to only use your HELOC for things that will help you financially, such as boosting the value of your home or paying for higher education.



  • You can consolidate debt at a low interest rate. A HELOC can be a useful choice if it allows you to consolidate your debts at a lower interest rate. You only need to pay interest on what you’re currently borrowing.

  • The money can be used for anything. HELOCs are also flexible, and can be used for anything you need the cash for, including college tuition or other education-related costs.

  • Gives you access to a large sum of cash. A second mortgage of any kind may be your best option for borrowing a large sum of cash, which can be useful for costly home improvement projects.

  • Borrow as much as you need. Along with their flexibility, HELOCs allow you to borrow as much money as you require. This is favorable if you aren’t sure how much money your project or investment will cost in the long run. So if a project ends up being under budget, you won’t have to worry about paying more than necessary in interest.

  • It can be tax-deductible. Speaking of home improvement, the interest you pay on a HELOC may be tax-deductible if you use the funds to make improvements to your home.

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