Best HELOC Lenders of December 2023

A home equity line of credit, or HELOC, can be an excellent tool that allows homeowners to access the equity in their home as needed. Most mortgage lenders offer HELOCs in some form, so here's a rundown of the important concepts you should know before applying for a HELOC of your own, as well as a list of the best HELOC lenders right now.

What is a home equity line of credit (HELOC)?

A home equity line of credit, or HELOC, is a type of revolving credit line that is backed by the equity you have in your home. If you aren't familiar with the concept of home equity, it is the difference between the market value of your home and any existing mortgage debt you owe on it. For example, if you own a home worth $250,000 and have a $150,000 mortgage balance, you have $100,000 in home equity.

When a borrower applies for and receives a HELOC, they don't receive any money right away. Instead, they receive a credit line with a limit determined by their lender and based on their home equity that they can choose to draw from as they need funds.

How does a HELOC work?

When you apply for a HELOC, the lender will typically appraise your home to determine its current market value. From there, the lender will calculate the maximum amount of mortgage debt your home's value can justify and then subtract any existing mortgage debt to determine how much you could borrow on a HELOC. In most cases, lenders won't allow a HELOC to increase a borrower's total loan-to-value (LTV) ratio beyond 80% of the home's value.

HELOCs typically have a draw period where the borrower is allowed to access their HELOC to borrow money. Some HELOCs only charge the borrower interest (not principal) in their monthly payment during the draw period. Then, at a predetermined time, the HELOC switches from the draw period to the repayment period. In the repayment period, the borrower is required to make principal and interest payments and is no longer able to access any unused borrowing capacity of the HELOC.

During the draw period, which typically lasts up to 10 years, there are usually several ways the borrower can access their HELOC. They may have a debit card linked to the credit line, or they might have a checkbook. In some cases, a HELOC borrower might be able to use their lender's online portal to transfer money into their checking account from the HELOC.

When it comes to interest rates, there's no set rule of thumb. HELOCs aren't standardized products in the sense that conventional mortgages are, so you're likely to see HELOC rates vary significantly between lenders.

Most HELOCs have variable interest rates that are linked to a certain benchmark interest rate, such as the Prime Rate. Many come with a low "teaser" rate for the first year or so. But under most circumstances, the variable rate you'll pay on a HELOC will be significantly higher than the current 30-year mortgage interest rate.

The main reason you'll likely see a higher HELOC rate is that although the HELOC is secured by your home, the lender is typically in second lien position to your primary mortgage lender. In other words, if you stop making payments, your main mortgage lender gets to foreclose and get their owed money first before the bank that issued your HELOC sees a dime.

To be clear, fixed-rate HELOC loans do exist. A select few lenders offer a fixed-rate loan option. But the overwhelming majority of HELOCs have variable rates.

What are the requirements for a HELOC?

The main requirement for a HELOC is that you have sufficient equity in your home from which to borrow. The most common cap in the mortgage industry is an 80% loan-to-value (LTV) ratio, so if your primary mortgage is equal to 50% of your home's value, you would potentially be able to obtain a HELOC with a limit equal to 30% of its value.

As an example, let's say that your home is worth $500,000 and you owe $150,000 on your mortgage. 80% of your home's value would be $400,000, so you should expect the maximum HELOC limit most lenders will approve to be the difference between this amount and your mortgage amount, or $250,000.

Some lenders have slightly higher LTV maximums of 85% or even 90%. In any event, your home will need to be worth significantly more than you owe on your primary mortgage for a HELOC to be possible.

You'll also need to qualify for a HELOC based on your credit score and income. Even though the HELOC is secured by the equity in your home, the lender will want to verify that you're able to pay it back and are likely to make your payments on time.

It's also worth mentioning that since banks generally perceive HELOCs as riskier home loans, it's common to see lending standards increase significantly during recessions and other uncertain economic times.

HELOC vs. home equity loan: What's the difference?

Home equity lines of credit and home equity loans are terms that are often used interchangeably, but they actually refer to two very different loan products. Both are forms of "second mortgages," meaning that they're loans that are backed by the value of your home and they can be originated in addition to an existing mortgage.

The biggest difference between the two is that with a home equity loan, you borrow a predetermined amount and make regular and fixed loan payments. For example, you might obtain a home equity loan for $40,000, and you'll receive (and owe) the entire amount whether you intend to spend it or not.

On the other hand, a HELOC is a credit line that can be accessed as needed (or not at all). Technically speaking, a home equity loan is a form of installment loan debt, like a primary mortgage, while a HELOC works as a type of revolving debt, similarly to a credit card.

Learn more: HELOC vs. home equity loan

How to find the best HELOC lender

Just like when you're shopping for a primary mortgage, it's important to shop around for a HELOC. Interest rates, closing costs, and other fees vary dramatically among HELOC lenders, and multiple HELOC applications won't negatively impact your credit score. The FICO? credit scoring formula has special provisions that encourage rate shopping, so whether you apply with one HELOC lender or a dozen, it will count the same for scoring purposes as long as all of your applications take place within a couple weeks of each other.

A good place to start is our list of best HELOC lenders you'll find on this page. Choose a few that meet your needs and then apply with a few of them to see the HELOC terms you'll be offered. You might be surprised how much your HELOC offers can differ between lenders. Once you've done this, simply choose the best one and accept the offer.

Pros and cons of HELOCs

Alternatives to HELOCs

There are a few potential alternatives to obtaining a home equity line of credit. To name the most common:

• Home equity loan: We mentioned this earlier, but a home equity loan is similar to a HELOC, with the main difference being that the loan amount is fixed. Check out our picks for the best home equity loans.
• Cash-out refinance: Like a home equity loan, a cash-out refinance is for a set amount of money. However, while a home equity loan is completely separate from your primary mortgage, a cash-out refinancing replaces your existing mortgage with a completely new (and larger) one. This is usually a more desirable option when interest rates are low, and is less attractive if prevailing mortgage rates are significantly more than you're paying on your current loan.
• Credit card: Credit cards are typically not desirable ways to pay for large expenses, with one key exception. If you can get a credit card with a 0% intro APR, and you're sure you can pay the balance before interest starts to kick in, this can be a reasonable way to finance home improvements or other major purchases.
• Personal loan: A personal loan is distinguished by two characteristics. First, it is an installment loan, not a revolving credit line. Second, it isn't backed by any asset (like your home), making it an unsecured form of debt. Personal loans are commonly used for many of the same purposes as HELOCs, such as home renovations, but since they aren't secured by your home equity, you may be able to use one even if you don't have much equity in your home.