Where To Get a Home Equity Line of Credit

A home equity line of credit (HELOC) can be a powerful tool for tapping your home's equity. But it can also be risky. Here's how a HELOC works, where to get one, and what features to look for in a good HELOC. 

How a HELOC Works

A HELOC is a credit line secured by the equity you have built up in your home. When you take out a HELOC, the lender will usually give you a checkbook or credit card that you can use to draw on it. You can borrow money as needed, up to the limit on your credit line. That differs from a home equity loan, where you typically receive a single lump sum of money at the outset.

Most HELOCs have a set draw period along with a repayment period. The draw period is typically between five and 15 years and the repayment period between 10 and 20 years. During the draw period, you may have the option of making interest-only payments, but during the repayment period, your payments will increase to include both interest and a portion of the loan principal. As you pay down the principal, more of your credit line can become available to you again.

HELOCs generally have a variable interest rate, but some fixed-rate HELOCs are available. With a variable interest rate, the amount of your monthly payment can go up significantly over time if interest rates are rising. With a fixed interest rate HELOC, your interest rate will remain the same regardless of the current market rate.

The interest you pay on a HELOC can also be tax-deductible in certain circumstances, depending on what you use the money for.

Where To Get a HELOC

HELOCs can be found at most financial institutions that offer mortgages or credit lines. A local credit union or bank branch may be a convenient option, but you can also search for a HELOC online. Because rates and terms differ, it's a good idea to shop around.

Note that some companies that advertise what appear to be HELOCs may actually be offering a home equity loan in disguise. So make sure you know what the deal is before signing up for anything. 

What To Look for in a HELOC

• No prepayment penalty: Ideally, you will want to be able to pay off your HELOC faster when you can afford to, especially if interest rates are rising. A HELOC with no prepayment penalty will give you the greatest flexibility. 
• No fees: The HELOC market is competitive, so origination fees are rare and it's easy to avoid them, saving you money. 
• A low interest markup (or a fixed interest rate): The interest rate markup, also called the margin, is the difference between the prime rate and the higher interest rate that your lender will charge you. A low markup of 0.5% to 0.75% will save you money in interest, regardless of how high or low the prime rate goes. To save on interest in a rising rate environment, a fixed interest rate HELOC may be a better option if you can find one. 
• No minimum balance requirement: Some HELOCs will have a minimum balance requirement and it's usually a good idea to avoid them. A minimum balance requirement can trap you into borrowing more than you may need or paying extra fees if you don't maintain a high enough balance.
  

The Bottom Line

You can get a HELOC almost anywhere mortgages and other loans are offered. For the best deal, look for a competitive interest rate with no fees, no prepayment penalties, and no minimum balance requirement.