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HELOC Pros and Cons

A home equity line of credit (HELOC) enables borrowers to take cash out of their home but is more flexible than a home equity loan and less costly than a cash-out refinance.  A HELOC is similar to a home equity loan except that instead of borrowing a set amount of money at a fixed interest rate when the loan closes, a HELOC enables borrowers to draw dawn and repay the line of credit as needed.  HELOCs are typically structured as either an interest only or adjustable rate loan during the draw period, which is usually the first ten years plus one month of the loan, when the borrower can draw down and repay the line multiple times.  The remaining 10-to-20 years of the line is called the repayment period during which the borrower can no longer draw down the line and is required to pay-off the outstanding line balance.  A HELOC offers several positives and negatives when compared to other financing options for taking cash out of your home such as a home equity loan or cash-out refinance.  HELOC advantages include the flexibility to draw down and repay the line an unlimited number of times during the draw period, a lower initial interest rate, saving money as compared to a refinance and the ability to draw down only the amount of money you need when you need it.  Disadvantages include a potential increase in interest rate and monthly payment and possibly additional fees.   We review the full list of the pros and cons for a HELOC below.  Borrowers should understand both the positives and negatives of a HELOC to determine if it is the right financing option to access the equity in their homes.


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Lower Initial Interest Rate and Monthly Payment

The initial interest rate on a HELOC is usually lower than the rate on a home equity loan and in some cases lower than the current market interest rate for a first mortgage. Many lenders offer HELOCs with a loan introductory rate, also called a teaser rate, and then the interest rate increases and is subject to change on a monthly, semi-annual or annual basis for the remainder of the line. The introductory period usually ranges from one month to a year with the shorter the period, the lower the rate. A lower interest rate results in a initial lower monthly payment for borrowers. Additionally, borrowers can select an interest only HELOC in which case their monthly payment is comprised of only interest and no principal during the draw period which results in an even lower monthly payment. Finally, because borrowers can control and lower their loan balance with a HELOC, they can reduce their monthly payment to meet their financial needs.

Use the table below to shop HELOC lenders. The table shows interest rates and estimated payments for both HELOCs and home equity loans so you can compare financing options. The initial rate and monthly payment for a HELOC are lower than for a home equity loan but the rate and payment can increase significantly over the course of the line. Comparing multiple lenders and loan products is the best way to save money on a HELOC.

Rate Details*
Loan Program:  
Monthly Payment:  
Points  More Info:
Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
Total Lender Fees:  
Loan type:  
Property Value:  
Loan to Value:  
Credit Rating:  
Date Submitted:  
Monthly Housing Payments
P & I More Info
Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
Mortgage Insurance More Info
Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
Property Tax More Info
Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
Homeowner Insurance More Info
Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
Homeowner Association Fee More Info
Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
(If Any)
Total Monthly Housing Payments
Lender Fees
Points More Info
Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
Origination Fee More Info
Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
Credit Report Fee More Info
Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
Tax Service Fee More Info
Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
Processing Fee More Info
Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
Underwriting Fee More Info
Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
Wire Transfer Fee More Info
Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
(If Any)
FHA Upfront Premium More Info
FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
(If any)
VA funding Fee (If any)
Flood Fee
Other Fees More Info

Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

Total Lender Fees
*Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
Current Home Equity Loan Rates in , as of December 13, 2018
Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
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Ability to Draw Down and Repay HELOC Unlimited Number of Times

The main benefit of a HELOC is that borrowers can draw down, repay and draw down the line an unlimited number of times during the draw period, which is usually the first ten years and one month of the line.  This gives borrowers significantly more financial flexibility with a HELOC as compared to a home equity loan or refinance when borrowers receive a fixed amount of proceeds upfront when the loan closes.  Additionally, the line offers borrowers greater borrowing capacity than a home equity loan because you can draw down the line multiple times.  For example, with a $50,000 HELOC you can draw down $50,000 in years one through ten of the line assuming you have paid down your balance in full in between each draw. 

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Save Time and Money as Compared to a Refinance

A HELOC saves you time and money as compared to other options for accessing the equity in your home such as a cash-out refinance or reverse mortgage.  Closing costs are usually lower than for a refinance because the loan amount is smaller.  Additionally, the application and closing processes for a HELOC are streamlined as compared to a full refinance.  

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Draw Down Only the Amount of Money You Need

A HELOC provides the flexibility to draw down only the amount of money you need at any given point in time.  For example, some borrowers may put a line in place even though they have no immediate use of proceeds.  In this case, a borrower could have a $50,000 line of credit but zero loan balance when the HELOC closes because they did not draw down the line.  With a HELOC, your monthly payment and interest expense are based on your outstanding loan balance so providing the flexibility to draw down the specific amount of money you need when you need it helps you manage your payment and reduce your interest expense.  By comparison, with a home equity loan, borrowers receive the full amount of loan proceeds when their loan closes even if they do not have an immediate need for all the money.

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Lower Total Interest Expense Over Life of Loan

The total interest expense borrowers pay over the life of a HELOC is usually less than the total interest when you refinance your existing mortgage.  This is because a HELOC loan amount is usually smaller than a new mortgage when you refinance -- a smaller loan means you pay less interest expense.  Additionally, when you refinance your mortgage you are effectively extending the length of your existing loan unless you reduce your term or loan balance.  A HELOC provides a much more precise and cost-effective way to access the equity in your home.  Adding a HELOC to your existing mortgage instead of using a cash-out refinance can save you thousands of dollars in interest over the life of your mortgage.   

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No Restrictions on Use of Proceeds

Although lenders want to understand the use of proceeds for a HELOC, there are typically few restrictions on how borrowers spend the money.  Borrowers can use the proceeds from the line for any number of purposes including home improvements and remodeling, college tuition, paying off high interest credit card debt or buying a vacation home.  A HELOC affords borrowers significant flexibility on how they access and use the equity in their home.

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Increased Borrowing Capacity

The maximum borrower debt-to-income ratio for a HELOC is usually higher than for a mortgage which potentially increases your borrowing capacity.  For example, the maximum debt-to-income ratio for a mortgage is usually 43% to 47% depending on several factors including your credit score and loan-to-value (LTV) ratio while the maximum debt-to-income ratio for a HELOC is typically 55%.  The higher the debt-to-income ratio, the higher the line amount you qualify for.  To determine what size line you qualify for lenders typically focus more on how much equity you have in your home and the combined loan-to-value (CLTV) ratio of your first mortgage plus your the fully drawn line.

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HELOC Interest is Tax Deductible in Most Cases

Interest expense on a HELOC is tax deductible as long as the loan proceeds are used to buy, build or substantially improve the property that secures the loan.  Additionally, HELOC interest is tax deductible as long as the total amount of loans secured by the property does not exceed the value of the property and the total amount of the loans, including the first mortgage, does not exceed $750,000 (in most cases).  For example, if you take out a HELOC to renovate or upgrade your home, then the interest expense on the line is usually tax deductible.

Use the FREEandCLEAR Lender Directory to search for lenders by loan program and type of lender.  Our directory enables you to find leading lenders that offer HELOCs.



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Interest Rate Can Change

The interest rate on a HELOC is subject to change and potentially increase on a monthly, semi-annual or annual basis depending on your loan terms.  The rate on the line fluctuates based on changes in an underlying interest rate such as LIBOR or the prime interest rate.  An increase in the index rate increases the interest rate you pay on your outstanding HELOC loan balance and increases your monthly payment.  By comparison, the interest rate for most home equity loans is fixed.  Although rate caps usually limit how much your interest rate can increase with a HELOC, borrowers should fully understand the risk involved.

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Monthly Payment Can Increase Significantly When the HELOC Resets

Borrowers with interest only HELOCs can experience a significant jump in their monthly payment at the end of the draw period when the loan resets.  At the end of the draw period borrowers can no longer draw down on their line and are required to start paying down their line balance.  This means that borrowers' monthly payments are comprised of both principal and interest instead of only interest which usually causes the payments to increase significantly.  Additionally, the HELOC interest rate can also increase which would cause the monthly payment to go up even more.  Borrowers can manage potential payment shock by paying down their HELOC balance before the draw period ends.

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Beware Additional Fees

Some lenders charge extra fees including non-utilization fees and pre-payment penalties for HELOCs.  Some lenders apply a non-utilization fee if borrowers do not draw down their line or lenders may charge a pre-payment penalty if borrowers pay off their line within a specified period of time.  Borrowers should avoid pre-payment penalties and be aware of any extra fees before selecting a HELOC lender.

More FREEandCLEAR Resources

Mortgage Guides

How a Home Equity Line of Credit (HELOC) Works

Review our comprehensive overview of how a HELOC works including types of lines, key loan terms, borrower qualification requirements, interest rates and combined loan-to-value (CLTV) ratio limits.


Home Equity Line of Credit (HELOC) Rates

HELOCs are offered by traditional lenders such as banks, mortgage banks and credit unions with credit unions usually offering the most attractive terms.  Use our HELOC rate tables to compare interest rates and fees for lenders in your area.  Comparing rates from multiple lenders is the best way to save money on your HELOC.


Comparing a HELOC to a Home Equity Loan

Review our detailed comparison of a HELOC to a home equity loan including interest rate, monthly payment and reasons to use each financing option.  Compare a HELOC to a home equity loan to determine the best financing option for you based on your personal and financial objectives.


Best Ways to Take Cash Out of Your Home

Review and compare numerous ways to access the equity in your home including a HELOC, home equity loan, cash-out refinance and reverse mortgage.  Understand the positive and negatives of each financing option to select the one that is right for you.



About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry


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