The Bankrate guide to home equity lines of credit (HELOCs)

Why trust Bankrate?

At Bankrate, our mission is to empower you to make smarter financial decisions. We’ve been comparing and surveying financial institutions for more than 40 years to help you find the right products for your situation. Our award-winning editorial team follows strict guidelines to ensure our content is not influenced by advertisers. Additionally, our content is thoroughly reported and vigorously edited to ensure accuracy.

When shopping for a HELOC, look for a competitive interest rate, repayment terms that meet your needs and minimal fees. Loan details presented here are current as of the publish date. Check the lenders’ websites for more current information. The top lenders listed below are selected based on factors such as APR, loan amounts, fees, credit requirements and broad availability.

Summary: HELOCs in 2021

Best home equity line of credit (HELOC) rates in April 2021

Lender
Loan amount
Loan term
APR range
Min. credit score
Fifth Third Bank
$10,000–$500,000
10-year draw, 20-year repay
3.75%–7.15% (with autopay)
Not specified
Chase Bank*
$50,000–$500,000
10-year draw, 20-year repay
3.75%–6.26%
Not specified
Bank of America
$15,000–$1 million
10-year draw, 20-year repay
Starting at 4.70% (with autopay)
Not specified
Flagstar Bank
$10,000–$500,000
10-year draw, 20-year repay
Starting at 3.99% (with autopay)
Not specified
Figure
$15,000–$250,000
5–30 years
Starting at 2.88% (with autopay)
620
Citizens Bank
Starting at $5,000
10-year draw, 15-year repay
2.50%–21% (with autopay)
Not specified
BMO Harris Bank
$25,000–$150,000
10-year draw, 20-year repay
Starting at 3.50% (with autopay)
700
Navy Federal Credit Union
$10,000–$500,000
20-year draw, 20-year repay
5%–18%
Not specified
PenFed Credit Union
$25,000–$500,000
10-year draw, 20-year repay
3.75%–18%
620
Citi
$10,000–$1 million
10-year draw, 20-year repay
4.09%–6.99% (with autopay)
Not specified
TD Bank
Starting at $25,000
Unspecified
3.74%–18% (with autopay)
740

*Chase, Navy Federal Credit Union and Citi have suspended applications for new HELOCs.

What are today's current HELOC rates?

Loan Type
Average Rate
Average Rate Range
Home equity loan
5.26%
3.25% - 7.11%
10-year fixed home equity loan
5.72%
3.25% - 7.49%
15-year fixed home equity loan
5.85%
3.25% - 7.74%
HELOC
4.02%
1.99% - 6.85%

To conduct the National Average survey, Bankrate obtains rate information from the 10 largest banks and thrifts in 10 large U.S. markets. The rates shown above are calculated using a loan or line amount of $30,000, with a FICO score of 700 and a combined loan-to-value ratio of 80 percent.

What is a home equity line of credit, or HELOC?

A HELOC is a variable-rate home equity product that works like a credit card. It’s different from a home equity loan; instead of funds getting disbursed in a lump sum, you have access to a credit line that you can draw from and pay back as needed.

HELOC rates are tied to a benchmark interest rate. As the prime rate moves up or down, so does your HELOC rate. Payments vary depending on the interest rate and how much money you have used. However, some lenders will allow you to convert an adjustable rate into a fixed rate for some or all of your HELOC balance.

How does a HELOC work?

With a HELOC, you’re given a line of credit that’s available for a set time frame, usually up to 10 years. This is called the draw period — during this time, you can withdraw money as you need it.

You can typically choose between a HELOC with an interest-only draw period and one that allows you to pay both interest and principal, helping you pay off the line of credit faster.

When the line of credit’s draw period expires, you enter the repayment period, which can last up to 20 years. You’ll pay back the outstanding balance that you borrowed, as well as any interest owed. A lender may allow you to renew the credit line.

What is a good HELOC rate?

Home equity line of credit rates are determined by your financial situation and your credit score. If you have good credit, your HELOC rate could be around 3 percent to 5 percent. If you have below-average credit, you'll likely fall within the 9 percent to 10 percent range.

The average HELOC rate, as of March 31, 2021, is 4.61 percent. Generally speaking, any rate below the average would be considered a good HELOC rate.

Who is a HELOC best for?

A HELOC is best for people who need access to funds over a number of years and who are comfortable using their homes as collateral for the loan. Because you have the ability to draw as much as you need from a HELOC over 10 to 15 years, it's a good option if you have a series of ongoing home improvement projects planned.

How do I qualify for a HELOC?

In addition to estimating your home equity, lenders look at your credit history, credit score, income and other debts. Most lenders require a total loan-to-value ratio of 85 percent or less, a credit score of 620 or higher and an adequate debt-to-income ratio to approve you for a home equity line of credit.

How does the coronavirus affect HELOCs?

HELOCs have been hit hard by the COVID-19 pandemic. Interest rates plunged, and as a result, many banks became overwhelmed by new applications. Now may be a good time to get a HELOC or lock in a fixed rate if you have the option, but economic uncertainty and the influx of potential borrowers have also caused some banks to tighten eligibility requirements and even suspend HELOC applications altogether. If you've been thinking about getting a HELOC, it may be worthwhile to send in your application now as home equity lending picks back up.

If you have a HELOC and you're having trouble making payments due to COVID-19, contact your lender; many lenders have extended hardship relief options.

Common uses of a HELOC

HELOCs are often used for home improvement projects like kitchen remodels or additions, though some homeowners use a HELOC for consolidating debt or paying off high-interest credit cards. Tapping the equity in your house to pay off debt does come with the risk of potentially losing your home if you find yourself unable to make the payments.

Some of the most popular ways homeowners use HELOC funds include:

  • Home improvements. Using your home equity to pay for home improvement projects is a smart move, especially if the home improvement projects will increase the value of your home.
  • Medical expenses. A HELOC may be a good option if you have large or ongoing medical expenses and want to take advantage of low interest rates.
  • Large purchases. Because HELOCs have longer repayment periods than many loans, they may be an attractive choice for making large purchases. Just make sure you have a plan in place to make consistent payments during the repayment period.
  • Tuition or education costs. If you have ongoing education costs, it may make more sense to take out a HELOC than a loan, as some HELOCs have lower interest rates than student loans. Just keep in mind that some lenders place restrictions on how you can use funds with regard to college tuition.
  • Debt consolidation. A HELOC's similarity to a credit card, and its lower interest rates, may make it a good choice for consolidating credit card debt. However, be careful not to rack up even more debt during the HELOC's draw period.

Pros and cons of HELOCs

HELOCs offer a combination of relatively low interest rates and a lot of flexibility. If you need money over a staggered period — for example, at the beginning of each semester for the next four years to pay for a child’s college tuition or for a remodeling project that will take three years to finish — a line of credit is ideal. It gives you the flexibility to borrow only the amount you need, when you need it. And if you borrow relatively small amounts and pay back the principal quickly, a line of credit can cost less than a home equity loan.

However, there are always risks when you take out a loan, especially one that's secured by your home. Here are some of the key considerations for getting a HELOC.

Pros:

  • Typically lower up-front costs than home equity loans.
  • Lower interest rates than those of credit cards.
  • Usually low or no closing costs.
  • Interest charged only on the amount of money you use.

Cons:

  • Lenders may require minimum draws.
  • Interest rates can adjust upward or downward.
  • Lenders may charge a variety of fees, including annual fees, application fees, cancellation fees or early closure fees.
  • Late or missed payments can damage your credit.

HELOC vs. home equity loan

While HELOCs and home equity loans are similar in some ways, they have a few distinct differences. These are some of the key factors you should consider when deciding between a HELOC and a home equity loan.

HELOCs Home equity loans
Interest rates Variable Fixed
APRs Slightly lower Slightly higher
Funds disbursement Draw as much as you need, when you need it Lump sum
Repayment terms First 5–10 years: Interest-only payments

Last 10–20 years: Interest and principal

 10–30 years of fixed payments
Best for Ongoing home improvement projects, college tuition payments, medical expenses Debt consolidation, large home improvement projects, major purchases

HELOC vs. cash-out refinance

HELOCs and cash-out refinances are both valid ways to tap your home's equity. A cash-out refinance involves replacing your current home mortgage with a larger home loan. The difference between the current mortgage and the new loan is disbursed to you in the form of a lump sum.

The main difference between a cash-out refinance and a HELOC is that a cash-out refinance requires you to replace your current mortgage, while a HELOC adds a loan to your current mortgage. While both methods can be useful for borrowing what you need, you should consider what your financial goals and needs are before applying.

A HELOC may be a better option for you if:

  • You want more flexibility when borrowing money and paying off your loan.
  • You already have a good interest rate and terms on your current mortgage.
  • You're planning on using your HELOC for home improvement purposes only. If your HELOC is used for home improvement projects, your interest may be tax deductible.

A cash-out refinance may be a better option for you if:

  • You prefer a fixed monthly payment for budgeting and tracking your spending.
  • You want to get a lower rate on your mortgage.
  • You want to withdraw more home equity — some lenders may let you tap up to 90 percent of your home's value.

How to apply for a HELOC

With most HELOC lenders, you can generally get the application process started in just a few minutes online. You’ll simply enter some personal and financial information, such as your name, address, salary, desired loan amount and estimated credit score.

To apply for a HELOC, start with these steps:

  1. Check your credit score. The higher your credit score, the better your rates and the more likely you are to be approved. If you have a credit score in the mid-600s or below, work to pay off existing debt and make timely payments on your credit cards to improve your score.
  2. Shop around. It's rarely wise to choose the first HELOC lender you see. To make sure you're getting the best rate and terms possible, research a few lenders and take advantage of any prequalification offers available.
  3. Gather your application materials. Many lenders will ask for your Social Security number, salary, employment information and estimated home value. Now is also a good time to collect details about your home's outstanding mortgage balance. After you apply, lenders should reach out within a few days, although some online lenders offer same-day approval.
  4. Complete the verification process. Once you've accepted a loan offer, you'll have to provide verification documents, which may include pay stubs, W-2s or tax returns. You may also have to get an appraisal on your home. At this time, lenders will perform a hard credit check, which will temporarily ding your credit score.
  5. Receive funds. The time between offer acceptance and funds disbursement varies by lender, but some lenders may make HELOC funds available in as little as one week. From there, you can use your funds as needed and begin making payments.

Best HELOC lenders in April 2021

If you’ve built home equity and need to fund an upcoming expense, a home equity line of credit can be a good way to access money using your home as collateral. Homeowners can use these funds for a range of expenses, including home improvement projects and debt consolidation.

The best HELOC lenders offer lines of credit with competitive interest rates, low fees and an easy online application process. We analyzed HELOC offers from a wide range of banks, credit unions and online lenders to come up with this list of top lenders in this space:

Fifth Third Bank: Best home equity line of credit with fixed-rate option

Overview: Fifth Third Bank offers checking and savings accounts, personal loans, home loans and more. The bank’s HELOC product, the Fifth Third Equity Flexline, has low fees and a low minimum APR.

Perks: For a $95 fee, you can lock in your balance with a fixed rate over a fixed term, which is a great feature if you have a low rate and want to guarantee it over a set number of years. You can also earn Real Life Reward points when you use your loan funds for purchases using a credit card tied to your line of credit, and you get a 0.25 percent discount for autopay with a Fifth Third deposit account.

What to watch out for: Fifth Third offers HELOCs in only 11 states.

Lender Fifth Third Bank
Interest Rates 3.75% to 7.15% APR (with autopay)
Qualifications Not specified
Available Term Lengths 10-year draw period with a 20-year repayment period
Line of Credit Amount $10,000 to $500,000
Fees There are no closing costs, but a $65 annual fee applies (waived in the first year). Additional fees can apply to condominiums and investment properties.

Chase Bank: Best home equity line of credit for customer discounts

Note: Due to the impacts of COVID-19, Chase has suspended applications for new HELOCs. The information presented below reflects Chase’s previous offerings.

Overview: Chase is a national bank with branches and ATMs in 38 states and Washington, D.C. For its HELOCs, Chase customers may qualify for a rate discount up to 0.62 percent, and the lender waives certain fees for its customers. Other banks also offer relationship discounts, but Chase’s are more easily attainable.

Perks: You can get 0.25 percent off your interest rate just for owning a qualified Chase account, another 0.12 percent off when you set up automatic payments from a Chase checking account and an extra 0.25 percent off when you’re planning a $30,000 home improvement project or you withdraw $30,000 from your home equity line at closing. Plus, Chase pays for closing costs in most cases, and you can convert some or all of your balance to a fixed-rate loan during the life of the account.

What to watch out for: There’s a $50 origination fee and a $50 annual fee, though these are waived for qualified existing Chase home equity customers. Chase also has stricter credit requirements than some; its minimum credit score is 680. And although Chase has hundreds of locations across the country, HELOCs aren't available in Alaska, Hawaii and South Carolina.

Lender Chase Bank
Interest Rates 3.75% to 6.26% APR
Qualifications Not specified
Available Term Lengths 10-year draw period with a 20-year repayment period
Line of Credit Amount $50,000 to $500,000
Fees There’s a $50 origination fee (waived for existing customers) and a $50 annual fee after the first year. Some borrowers may have to pay property insurance, flood insurance and a mortgage recording tax.

Bank of America: Best home equity line of credit for low fees

Overview: Bank of America offers HELOCs in all 50 states and Washington, D.C., and nixes a lot of fees that other banks charge. You can also shave 0.25 percent off your rate when you set up automatic payments from a Bank of America checking or savings account, up to 0.75 percent off for making an initial withdrawal and up to 0.375 percent off for being a Preferred Rewards client.

Perks: If you qualify for the entire 1.375 percent discount on your interest rate, you’ll save a lot over the life of your loan. There are no application fees, no annual fees and no closing costs on lines of up to $1 million. Rates vary depending on creditworthiness, loan amount and other factors, but they may go as low as 4.70 percent APR in some states. As with some other lenders, you can convert some or all of your balance to a fixed-rate loan.

What to watch out for: The best rate discounts are reserved for Preferred Rewards members and those who make large draws from their HELOCs.

Lender Bank of America
Interest Rates Starting at 4.70% APR in some states (with autopay)
Qualifications Not specified
Available Term Lengths 10-year draw period with a 20-year repayment period
Line of Credit Amount $15,000 to $1 million
Fees There are no application fees, no closing costs and no annual fees for qualified accounts.

Flagstar Bank: Best home equity line of credit for good credit

Overview: Flagstar Bank offers HELOCs that feature flexible withdrawal methods and affordable rates for those who can qualify. If you’re looking for a HELOC that offers attractive terms and you have a solid credit rating, you should check it out.

Perks: Flagstar has flexible loan amounts that range from as little as $10,000 to as much as $500,000. If you have strong credit, Flagstar may offer you some of the lowest rates in the business.

What to watch out for: There’s an annual fee of $75, though it’s waived in the first year. And while most banks let you convert some or all of your balance to a fixed-rate loan, Flagstar’s APR remains variable for the life of the loan. That means you may pay more in interest. Flagstar's loan offerings also vary by ZIP code; the details here are presented for the 49546 ZIP code.

Lender Flagstar Bank
Interest Rates Starting 3.99% APR (with autopay)
Qualifications Borrow up to 80% of your home’s value; not valid in Texas
Available Term Lengths 10-year draw period with a 20-year repayment period
Line of Credit Amount $10,000 to $500,000
Fees The annual fee is $75 (waived the first year), and borrowers may have to pay back closing fees if the account is closed within 36 months. Some loans require title insurance, government taxes and fees at closing.

Figure: Best home equity line of credit for fast funding

Overview: Figure is an online lender that currently offers HELOCs in 41 states and Washington D.C., with rates as low as 2.88 percent APR, which includes discounts for enrolling in autopay and opting into a membership with one of its partner credit unions. This rate also includes an origination fee of up to 4.99 percent. Figure promises an easy online application process and fast funding, which is why it made our list. Its HELOC works a bit like a home equity loan in the beginning: You get the full loan amount (minus the origination fee) with a fixed rate. As you pay off the line of credit, you can borrow funds again up to the limit. These draws will get a different interest rate.

Perks: Figure could be a good option for borrowers who need fast cash. You could get approved online in five minutes and funded in as little as five business days. There’s also a fixed interest rate, which means the payments won’t change over the life of the loan unless you make additional draws.

What to watch out for: While some lenders offer a wide range of loan amounts, Figure caps its loans at $250,000 — though you may qualify for less, depending on your loan-to-value ratio and credit score. That might not be enough for some borrowers. There’s also an origination fee of as much as 4.99 percent.

Lender Figure Lending LLC
Interest Rates Starting at 2.88% APR (with autopay, partner credit union membership discount and origination fee)
Qualifications Borrow up to 95% of your home’s value, depending on lien position and credit score. The minimum credit score is 620 most states and 720 in Oklahoma.
Available Term Lengths 5 to 30 years
Line of Credit Amount $15,000 to $250,000
Fees Pay an origination fee of up to 4.99% of your initial draw.

Terms and conditions apply. Visit Figure.com for more details. Figure Lending LLC is an equal opportunity lender. NMLS #1717824

Citizens Bank: Best home equity line of credit for low loan amounts

Overview: Established in 1828, Citizens Bank now has 1,000 branches spread across 11 states in the New England, Mid-Atlantic and Midwest regions. If you’re looking to borrow a small amount and you prefer banking in person, Citizens Bank is a solid choice. Lines of credit begin at $5,000 with its GoalBuildder HELOC and $17,500 with its standard HELOC, and there are ways to get the best rate and save on fees.

Perks: With Citizens Bank, you can borrow as little as $17,500 and pay no setup or appraisal fees. Rates are also low, with APRs starting at 2.50 percent.

What to watch out for: There’s a $350 prepayment penalty if you pay off your HELOC and close it within 36 months, along with a $50 annual fee (waived in the first year). It also may take up to 45 days to get your funding, which could be a deal breaker for some. Additionally, Citizens Bank offerings may vary by ZIP code; loan details presented here are based on the 10019 ZIP code, but your available terms and interest rates may vary.

Lender Citizens Bank
Interest Rates 2.50% to 21% APR (with autopay)
Qualifications Not specified
Available Term Lengths 10-year draw period with 15-year repayment period
Line of Credit Amount Minimum $5,000, but lines over $200,000 are available and have the lowest rates
Fees There’s a $50 annual fee (waived in the first year) and a $350 prepayment fee if you close your HELOC within 36 months.

BMO Harris Bank: Best home equity line of credit for different loan options

Overview: Founded in 1847 and chartered under its current name in 2011, BMO Harris Bank has more than 500 branches spread across eight states. However, customers nationwide can bank with BMO online. Its HELOCs start at $25,000, come with flexible repayment terms and have no setup fees.

Perks: BMO Harris has a standard variable-rate HELOC, but you can also lock in all or part of your line at a fixed rate for a five- to 20-year term. Loan amounts start at $25,000, and there are no application fees or closing costs, and you get a 0.5 percent discount when you set up autopay with a BMO Harris checking account.

What to watch out for: Borrowers may have to repay setup costs if the line of credit is closed within 36 months. Depending on the state in which you live, you may also have to pay mortgage taxes.

Lender BMO Harris Bank
Interest Rates Starting at 3.5% APR in some states (with autopay)
Qualifications Typically, the minimum credit score for borrowers is 700.
Available Term Lengths 10-year draw period with 20-year repayment period
Line of Credit Amount $25,000 to $150,000
Fees BMO Harris covers the setup costs, but the borrower may have to repay those costs if the line of credit is closed within 36 months. Depending on the state, borrowers may also have to pay mortgage taxes. In some states, there is a $75 annual fee.

Note: Due to impacts of COVID-19, Navy Federal Credit Union is currently suspending applications for its HELOCs.

Overview: Established in 1933 and now with 10 million members, Navy Federal Credit Union is popular with service members, veterans and their families. It has a presence on four continents, earns top ratings for customer service and offers solid pricing on its financial products, including checking accounts, mortgages, auto loans and credit cards.

Perks: You may borrow up to 95 percent of your home's equity with an APR starting at 5 percent, with loans ranging from $10,000 to $500,000. There are no application, origination, annual or inactivity fees. If you set up recurring payments from a Navy Federal checking account, you can qualify for a 0.25 percent rate discount. Plus, Navy Federal will cover most of your closing costs.

What to watch out for: To apply for a HELOC, you must join the credit union, which limits membership to service members, veterans and their families. You may be responsible for certain fees and taxes, though Navy Federal doesn’t specify which ones. And if you close your account within three years, you'll have to reimburse Navy Federal for any closing costs it paid.

Lender Navy Federal Credit Union
Interest Rates 5% to 18% APR
Qualifications Borrow up to 95% of your home’s value
Available Term Lengths 20-year draw period with a 20-year repayment period
Line of Credit Amount $10,000 to $500,000
Fees There are no application, origination, annual or inactivity fees. If you close the account within 36 months, you will have to repay closing costs. You'll need to pay certain government fees and recording charges, credit report fees, taxes and, when required, appraisal fees, title insurance and any fees associated with condominium properties.

PenFed Credit Union: Best home equity line of credit with flexible membership requirements

Overview: Pentagon Federal Credit Union, or PenFed, serves 2 million members in all 50 states, Washington, D.C., and military bases in Guam, Puerto Rico and Okinawa. While PenFed has a history of serving service members, you may also qualify for membership by being a member of other select organizations. This credit union offers competitive rates on its HELOCs, along with other financial services, including credit cards, checking accounts, savings accounts, mortgages and auto loans.

Perks: PenFed's interest rates start at 3.75 percent and cap at 18 percent. It’s a low rate cap compared to some of the other institutions on this list. You’ll also get a break on certain fees, as PenFed pays most of the closing costs associated with its HELOCs.

What to watch out for: While this credit union has flexible membership requirements, you still have to join to apply for a HELOC. This adds a step to the process and could be a deal breaker for some. Additionally, if you close your account within 36 months, you’ll be on the hook for the closing costs PenFed paid on your behalf. There’s also a $99 annual fee (waived if you paid $99 in interest in the previous year), and you may have to pay taxes in certain states and appraisal fees if an appraisal is required.

Lender PenFed Credit Union
Interest Rates 3.75% to 18% APR
Qualifications Borrow up to 90% of your home’s value for owner-occupied properties and 80% for non-owner-occupied properties
Available Term Lengths 10-year draw period with a 20-year repayment period
Line of Credit Amount $25,000 to $500,000
Fees $99 annual fee, waived if $99 in interest was paid during the preceding 12-month period

Citi: Best home equity line of credit for flexible loan amounts

Note: Due to the impacts of COVID-19, Citi has suspended applications for new HELOCs. The information presented below reflects Citi’s previous offerings.

Overview: Citi is one of the largest financial institutions in the world and offers HELOCs in every state in the U.S. except Alaska. Its loan amounts are some of the most flexible we’ve seen, starting at $10,000 and going as high as $1 million. With Citi having a presence in nearly every state, just about any borrower can find a loan amount they need. The HELOCs also come with few to no fees.

Perks: You can borrow as little as $10,000 and as much as $1 million, giving you flexible options. There are no application fees, and Citi pays for most third-party closing costs. Customers who set up autopay may get a rate discount, although Citi doesn’t specify how much.

What to watch out for: While you can start a HELOC application online, you may need to visit a branch at closing.

Lender Citi
Interest Rates 4.09% to 6.99% APR (with autopay)
Qualifications Not specified
Available Term Lengths 10-year draw period with 20-year repayment period
Line of Credit Amount $10,000 to $1 million
Fees There’s a $50 annual fee during the draw period for most customers, and you can choose to pay closing costs and receive a rate discount. If you close the account within 36 months, you may have to repay closing costs that were paid on your behalf. Borrowers may also have to pay for property insurance and any fees to release an existing mortgage.

TD Bank: Best home equity line of credit for flexible loan amounts

Overview: TD Bank customers can visit its more than 1,200 branches, spread along the East Coast, even on a few federal holidays. It’s a great option if you prefer to bank in person. Of course, you can also bank by phone, online or via mobile app.

Perks: TD Bank typically ranks high in customer satisfaction and offers low rates on its HELOCs (starting at 3.74 percent in some areas). Borrowers may also get a 0.25 percent rate discount by setting up payments from a TD Bank checking account.

What to watch out for: Though TD Bank does charge fees, they’re mostly avoidable. The $50 annual fee applies to draws over $50,000, and if you close the account within 24 months, you may have to pay a 2 percent termination fee (max $450). There’s a $99 origination fee, and you may have to pay closing costs on certain accounts.

Lender TD Bank
Interest Rates 3.74% to 18% APR (with autopay)
Qualifications Minimum credit score of 740
Available Term Lengths Not specified
Line of Credit Amount Starting at $25,000
Fees There’s a $50 annual fee on loans over $50,000 and a $99 origination fee. The 2% termination fee (max $450) applies if you pay the line of credit off and close it within 24 months. You will also have to pay closing costs on lines over $500,000.

FAQ about home equity lines of credit

Is a HELOC a good idea?

A HELOC can be a good idea if used for home improvement projects that increase the value of your home. Because a HELOC lets you take out what you need when you need it, it’s best for ongoing projects or expenses.

A HELOC is not a good idea if you don't have a steady income or a financial plan to pay off the loan. Since you use your home as collateral, if you fail to make the payments in full and on time, you risk losing your home.

Are HELOC rates fixed?

Like credit cards, HELOCs typically have variable interest rates, meaning the rate you initially receive may rise or fall during your draw and repayment periods. However, some lenders have begun offering options to convert all or part of your variable-rate HELOC into a fixed-rate HELOC, sometimes with an additional fee.

Is a HELOC tax deductible?

Interest paid on a HELOC is tax deductible as long as it’s used to “buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS. Interest is capped at $750,000 on home loans (combined mortgage and HELOC or home equity loan). So if you had a $600,000 mortgage and a $300,000 HELOC for home improvements on a house worth $1.2 million, you could only deduct the interest on the first $750,000 of the $900,000 you borrowed.

If you are using a HELOC for any purpose other than home improvement (such as starting a business or consolidating high-interest debt), you cannot deduct interest under the tax law.

Which is better: A HELOC or a home equity loan?

Choosing between a HELOC and a home equity loan comes down to your financial situation, needs and priorities.

A HELOC usually has a longer repayment period and allows you to take only the money you need, when you need it, so it may be best for people who have ongoing expenses or those who prefer to pay debt back at their own pace.

A home equity loan, on the other hand, offers slightly more predictability in terms of monthly payments, since you'll receive a large sum of money up front and pay it back in monthly installments with a fixed interest rate. Home equity loans are usually best for people who need a lump sum right away and want a predictable monthly payment.

Will a HELOC hurt my credit score?

Due to the fact that HELOCs are revolving lines of credit, they can impact, and even hurt, your credit. When you apply, typically the lender will run a hard inquiry to assess your creditworthiness, and that can have a small impact on your credit score. While a hard inquiry may cause your credit score to drop a few points, you should be able to recover those points if you make timely payments on your HELOC balance.

That said, a HELOC will more significantly hurt your credit score if you fail to make on-time payments or if you miss payments altogether. You also run the risk of losing your home, since a HELOC uses it as collateral.

How to find the best HELOC rates

A HELOC can be a great financial tool to help raise the value of your home, but it also comes with risks. Before you apply, weigh the pros and cons to determine if a HELOC is the right option for you.

In your research, look for lenders with competitive rates and fees, plus terms that work for your financial situation. To find the best rate, try improving your credit score, clearing out existing debt and making additional mortgage payments to increase your home equity.

Home equity lenders reviewed by Bankrate

Home equity tips

A home equity line of credit, or HELOC, has an adjustable rate of interest attached to paying it off, which means that your payments can fluctuate based on the federal funds rate. Think about a home loan if the idea of an adjustable rate unnerves you.

Know your loan-to-value, or LTV, ratio. This is how much you owe versus how much the home is worth. Many people are in trouble now because their homes dropped in value. You don't want to be stuck owing more than your house is worth.

Figure out what the loan is for and how long you'll need the money to help decide which kind of loan you need. Home equity loans are better for single lump sum expenses while home equity lines of credit, or HELOCs, are best for prolonged expenses, like college tuition.