How to Get a Home Equity Line of Credit

A home equity line of credit (often abbreviated as HELOC) is similar to a credit card in some ways. The lender allows you to borrow money as you need it up to a stated limit. You even get a card with most HELOCs. Home equity lines of credit usually have lower interest rates than credit cards and the credit line can be in the tens of thousands of dollars. The reason for these differences is simple: you put your home up as collateral. Getting a HELOC isn't difficult as long as you have enough equity in your home. The process is a streamlined version of what is required to get a mortgage.

Step 1

Decide if you truly need a home equity line of credit. The up-front costs to set up a HELOC can run to several hundred dollars. Most people find a HELOC worthwhile for major expenses like home remodeling or college tuition, but not for the smaller everyday expenses credit cards are normally used for.

Step 2

Learn how a home equity line of credit works. Unlike credit card accounts, a HELOC is set up for a limited time, called the draw period (10 years is typical) after which you can no longer use it to borrow funds. You then must finish paying off any balance within a specified time, usually five years. A line of credit is not irrevocable. When real estate prices fall, lowering the value of your home, lenders can and do freeze or rescind HELOCs.

Step 3

Estimate how large a line of credit you can get. Lenders do this by taking 75 to 80 percent of the market value of your home and subtracting the outstanding balance of the mortgage. Using the same formula, you can make a good estimate of what you'll qualify for. If your home is worth $300,000, 75 percent of that is $225,000. If the mortgage balance is $175,000, your potential line of credit is $50,000.

Step 4

Shop around for the best rates and terms. Your own bank is a good place to start, but you should check other mortgage lenders to see who offers the lowest interest rates. Be sure to ask about the terms of the HELOC. You want to know the maximum interest rate, since most HELOCs have variable interest. Lenders may attach other conditions as well, such as a minimum draw, meaning you have to borrow a minimum amount ($500 is common).

Step 5

Arrange to have your home appraised and turn in the application for your home equity line of credit. You will have to pay for the appraisal plus an application fee. You may also be charged closing costs and points, just as you are with a regular mortgage. However, this isn't always the case and you may be able to negotiate with the lender to reduce or waive these charges.