A home equity line of credit, often referred to as a HELOC, is a revolving credit line that functions similarly to a credit card but is secured by a mortgage on your home. It allows you to access funds by tapping into your home's equity. To better understand how HELOCs differ from credit cards, let's take a closer look at how HELOCs work.

So, you’ve been making consistent, on-time mortgage payments and building up that sweet home equity. A HELOC is a flexible way to borrow against that equity and use it for whatever you need. And since your home serves as collateral, HELOCs usually come with lower interest rates because there’s less risk for lenders.

A home equity line of credit has two phases:

The HELOC draw period: During this phase, which typically lasts 10 years, you can access funds (draw) from your line of credit as often as you’d like, up to your credit limit. Your payments in this period will depend on your HELOC terms and may be either interest-only or principal plus interest, based on the amount you've borrowed. Unlike a traditional loan where interest is charged on the entire loan amount, during the draw period you'll only pay interest on the funds you actually use. Additionally, even during interest-only payment periods, you always have the option to make principal repayments.

The repayment period: After the draw period ends, you will begin the “repayment period.” During the repayment period you can no longer borrow from the credit line. What you have borrowed will be amortized into an interest and principal monthly payment which can be up to 20 years.

What could you use a HELOC for?

Think about big expenses where you don’t know exactly how much money you’ll need, but you know you’ll want a steady source of funds over a stretch of time. This could be anything from paying for college expenses to doing a renovation of your home or starting a business.

To qualify for a HELOC, there are several requirements you'll need to meet. First, you need equity in your home, which determines how much you can borrow against, so we’ll get into that first!

HELOC loan limits

When it comes to getting a home equity line of credit, the amount of equity you have in your home is a huge factor. The more you have, the higher your HELOC credit limit may be.

The equity in your home is based on your mortgage balance and how much your home is worth on the current market; this is referred to as the loan-to-value ratio, or LTV. Most banks require an LTV of 80% or less.

With HELOCs, you can typically borrow up to 80% of your home’s value, minus what you owe on your mortgage. For example, if your home is valued at $300,000 and you owe $100,000 on your mortgage, you may qualify for a HELOC of up to $155,000.

HELOC interest rates

HELOC interest rates are variable, meaning they change over time based on the market.

Lenders will set the HELOC interest rate based upon an index, this often is the prime interest rate published by the Federal Reserve. Lender’s may then add a margin to that rate. When the index rate changes, the rate on the HELOC will change, too. Rates can change as often as daily which means your monthly payment may increase or decrease depending upon these changes.

HELOC mortgage insurance

Great news on this front: you usually don’t need private mortgage insurance (PMI) for a HELOC. Here’s why:

Mortgage insurance is used to protect the lender if you stop making payments on your loan. But with a HELOC, the bank uses your home as collateral instead. This is no small matter, however—it means not making your HELOC payments could ultimately lead to foreclosure. The best move is to borrow carefully and make sure your HELOC’s repayment terms work with your budget in the long run.

HELOC credit score

A good credit score is essential for obtaining a HELOC. Most lenders require a score in the mid-600s or higher for approval. This not only helps you get that home equity line of credit, but can also mean a lower interest rate, which is why it’s always a good idea to keep an eye on your credit report to check for any discrepancies or errors.

HELOC DTI (Debt-to-income ratio)

Debt-to-income ratio (DTI) is a tool that tells lenders how much of your monthly income goes towards paying debts. Banks look at your DTI as an indicator of your financial eligibility. A low DTI tells them you manage your finances responsibly and are more likely able to handle additional debt.

Generally speaking, a lower DTI, the better. If you’re at 43% or less, you’re likely in great shape. It shows lenders you're not overloaded with debt, so taking on another financial responsibility shouldn’t be a problem.

Want to calculate your DTI? Just add up all your monthly debt payments (including your mortgage payment), then divide that number by your pre-tax monthly income.

HELOC income requirements

Having stable income is important. Lenders will want to see that you can handle your current debts plus your new HELOC payments. Showing a reliable income reassures lenders that you have the financial stability to pay bills on time, which makes securing a HELOC smoother and easier.

This isn’t necessarily about showing you have a traditional 9-5 job. It’s about showing the bank that you have a stable income, whether it’s from a regular salary, retirement income, commissions, tips or your own business’s revenue.

When you're applying for a home equity line of credit, you'll need to show proof of your income to get approved. This could be your recent pay stubs, W-2 forms from the past two years, or if you're self-employed, your tax returns.

Some lenders might also ask for bank statements to see your savings and how you manage your finances. Gather these documents, to show the lender that you have a steady income to cover the payments.

Here’s a quick guide on a HELOC vs. Home Equity Loan and how they compare side by side.

Tapping into your home's equity with a HELOC is easier than you think—the application process is pretty straightforward.

1. Assess your financial situation: Before applying, evaluate how much equity you have in your home using our HELOC Calculator. This is the difference between the market value of your home and any outstanding mortgage balances. Your lender will use this equity as the basis for your HELOC.
2. Check your credit score: Your credit score influences the terms of your HELOC, including the interest rate.
3. Gather required documents: You will need to provide financial documents such as proof of income, recent tax returns, statements of outstanding debts, and your mortgage details.
4. Apply Online or In-Person: You can apply for a HELOC with lenders like Citi either online or by visiting a local branch. If you prefer personal assistance, visiting a branch might be beneficial. If you have any questions or need guidance, speak with an advisor like a Citi specialist.
5. Complete the application: Fill out the application form with all the required information. Make sure to double-check for accuracy to avoid any delays in processing.
6. Undergo the appraisal: Your lender will arrange for an appraisal of your home to determine its current market value. This appraisal is a key factor in deciding the amount of credit available to you.
7. Wait for approval: After submitting your application and undergoing an appraisal, your application will be reviewed. This process can take a few weeks. Your lender will check your creditworthiness and the value of your home before making a decision.
8. Close on the HELOC credit agreement: After your application is approved, you will execute the HELOC agreement and the line of credit will be opened for you to begin accessing funds.
9. Access your funds: After you’ve closed, you’ll be able to draw from your home equity line of credit as needed, up to the limit specified in your agreement.

Ready to take the next step?