Home Equity Lines of Credit (HELOC)

WHAT YOU SHOULD KNOW ABOUT

Home Equity

Lines of Credit

(HELOC)

Borrowing from the

value of your home

Consumer Financial

Protection Bureau

An ofcial publication of the U.S. government

How to use the booklet

When you and your lender discuss home equity

lines of credit, often referred to as HELOCs,

you receive a copy of this booklet. It helps you

explore and understand your options when

borrowing against the equity in your home.

You can nd more information from the

Consumer Financial Protection Bureau (CFPB)

about home loans at cfpb.gov/mortgages.

You’ll also nd other mortgage-related CFPB

resources, facts, and tools to help you take

control of your borrowing options.

About the CFPB

The CFPB is a 21st century agency that

implements and enforces federal consumer

nancial law and ensures that markets for

consumer nancial products are fair, transparent,

and competitive.

This pamphlet, titled What you should know about

home equity lines of credit, was created to comply with

federal law pursuant to 15 U.S.C. 1637a(e) and 12 CFR

1026.40(e).

How can this booklet help you?

This booklet can help you decide whether

home equity line of credit is the right choice

for you, and help you shop for the best

available option.

A home equity line of credit (HELOC) is

a loan that allows you to borrow, spend,

and repay as you go, using your home as

collateral.

Typically, you can borrow up to a

specied percentage of your equity.

Equity is the value of your home minus

the amount you owe on your mortgage.

Consider a HELOC if you are condent

you can keep up with the loan

payments. If you fall behind or can’t

repay the loan on schedule, you could

lose your home.

After you nish this booklet:

• You’ll understand the effect of borrowing

against your home

• You’ll think through your borrowing and

nancing options, besides a HELOC

• You’ll see how to shop for your best HELOC

offer

• You’ll see what to do if the economy or your

situation changes

TIP

Renting your home out to other people may be

prohibited under the terms of your line of credit.

Compare a HELOC to other

money sources

Before you decide to take out a HELOC, it might

make sense to consider other options that might

be available to you, like the ones below.

VARIABLE IS YOUR

HOW MUCH CAN YOU TYPICAL TYPICAL

MONEY SOURCE

OR FIXED HOME AT

BORROW ADVANTAGES DISADVANTAGES

RATE RISK?

SECOND

Generally a

Fixed Yes Equal payments If you need more

percentage of the

that pay off the money, you need to

MORTGAGE OR

appraised value

entire loan apply for a new loan;

of your home,

repayment is often

HOME EQUITY

LOAN

minus the amount

required when you

You borrow against

you owe on your

sell your home

the equity in your

mortgage

home

CASH-OUT

Generally a

Variable Yes Continue to make Closing costs are

REFINANCE

percentage of the

or xed just one mortgage generally higher;

appraised value

payment it may take longer

You replace your

of your home; the

to pay off your

amount of your

mortgage; interest

existing mortgage

with a bigger

existing loan plus

rate may be higher

mortgage and take

the amount you

than your current

the difference in cash

want to cash out

mortgage

PERSONAL LINE OF

Up to your Variable, No Continue repaying

Solid credit is

CREDIT

credit limit, as typically and borrowing

required; you may

determined by the for several years

need to pay the

You borrow based on

lender without additional

entire amount due

approvals or

once a year; higher

your credit, without

using your home as

paperwork

interest rate than a

collateral

loan that uses your

home as collateral

HELOC

You borrow against

the equity in your

home

percentage of the

appraised value

of your home,

minus the amount

you owe on your

mortgage

typically

Generally a

Variable. Yes Continue

repaying and

Repayment amount

borrowing for

several years

often required when

without additional

approvals or

paperwork

varies; repayment is

you sell your home

2 HOME EQUITY LINES OF CREDIT COMPARE A HELOC TO OTHER MONEY SOURCES 3

Compare a HELOC to

other money sources

MONEY SOURCE

HOW MUCH CAN YOU

BORROW

VARIABLE

OR FIXED

RATE

IS YOUR

HOME AT

RISK?

TYPICAL

ADVANTAGES

TYPICAL

DISADVANTAGES

RETIREMENT PLAN

Generally, up Fixed No Repay through

If you leave or lose

LOAN

You borrow from your

to 50% of your

vested balance

or $50,000,

paycheck

deductions;

paperwork

your job, repay the

whole amount at

that time or pay

retirement savings

whichever is less required but no

taxes and penalties;

in a 401(k) or similar

credit check and

spouse may need to

plan through your

no impact on your

consent

current employer

credit score

HOME EQUITY

Depends on your Fixed or Yes You don’t make

The amount you owe

CONVERSION

age, the interest variable monthly loan

grows over time;

MORTGAGE (HECM)

You must be age 62

rate on your loan,

and the value of

your home

payments—

instead, you

typically repay the

you might not have

any value left in your

home if you want to

or older, and you

loan when you

leave it to your heirs

borrow against the

move out, or your

equity in your home

survivors repay it

after you die

CREDIT CARD

Up to the amount Fixed or No No minimum

Higher interest rate

You borrow money

of your credit limit, variable purchase;

than a loan that

from the credit card

company and repay

as determined by

the credit card

company

consumer

protections in the

case of fraud or

uses your home as

collateral

as you go

lost or stolen card

FRIENDS AND

Agreed on by Variable, No Reduced waiting Forgiven loans

FAMILY

You borrow money

the borrower and

lender

xed or

other

time, fees, and

paperwork

compared to a

and unreported or

forgiven interest can

complicate taxes,

from someone you

are close to

formal loan especially for large

loans; can jeopardize

important personal

relationships if

something goes

wrong

4 HOME EQUITY LINES OF CREDIT COMPARE A HELOC TO OTHER MONEY SOURCES 5

How HELOCs work

PREPARE FOR UP-FRONT COSTS

Some lenders waive some or all of the up-front

costs for a HELOC. Others may charge fees. For

example, you might get charged:

• A fee for a property appraisal, which is a formal

estimate of the value of your home

• An application fee, which might not be

refunded if you are turned down

• Closing costs, including fees for attorneys,

title search, mortgage preparation and ling,

property and title insurance, and taxes

PULL MONEY FROM YOUR LINE OF CREDIT

Once approved for a HELOC, you can generally

spend up to your credit limit whenever you want.

When your line of credit is open for spending, you

are in the you are in the borrowing period, also

called the draw period. Typically, you use special

checks or a credit card to draw on your line. Some

plans require you to borrow a minimum amount

each time (for example, $300) or keep a minimum

amount outstanding. Some plans require you to

take an initial amount when the credit line is set up.

MAKE REPAYMENTS DURING THE “DRAW

PERIOD”

Some plans set a minimum monthly payment that

includes a portion of the principal (the amount you

borrow) plus accrued interest. The portion of your

payment that goes toward principal typically does

not repay the principal by the end of the term.

Other plans may allow payment of the interest only,

during the draw period, which means that you pay

nothing toward the principal.

If your plan has a variable interest rate, your

monthly payments may change even if you don’t

draw more money.

ENTER THE “REPAYMENT PERIOD”

Whatever your payment arrangements during the

draw period—whether you pay some, a little, or

none of the principal amount of the loan—when the

draw period ends you enter a repayment period.

Your lender may set a schedule so that you repay

the full amount, often over ten or 15 years.

Or, you may have to pay the entire balance owed,

all at once, which might be a large amount called

a balloon payment. You must be prepared to

make this balloon payment by renancing it with

the lender, getting a loan from another lender, or

some other means. If you are unable to pay the

balloon payment in full, you could lose your home.

RENEW OR CLOSE OUT THE LINE OF CREDIT

At the end of the repayment period, your lender

might encourage you to leave the line of credit

open. This way you don’t have to go through the

cost and expense of a new loan, if you expect to

borrow again. Be sure you understand if annual

maintenance fees or other fees apply, even if you

are not actively using the credit line.

TIP

If you sell your home, you are generally required

to pay off your HELOC in full immediately. If you

are likely to sell your home in the near future,

consider whether or not to pay the up-front costs

of setting up a line of credit.

6 HOME EQUITY LINES OF CREDIT HOW HELOCS WORK 7



GET THREE HELOC ESTIMATES

Shopping around lets you compare costs and

features, so you can feel condent you’re making

the best choice for your situation.

OFFER A OFFER B OFFER C

Initiating the HELOC

Credit limit

First transaction

Minimum transaction

Minimum balance

Fixed annual percentage rate



Variable annual percentage rate



» Index used and current value

» Amount of margin

» Frequency of rate adjustments

» Amount/length of discount rate (if any)

» Interest rate cap and oor

Length of plan

» Draw period

» Repayment period

Initial fees

» Appraisal fee

» Application fee

8 HOME EQUITY LINES OF CREDIT GET THREE HELOC ESTIMATES 9



GET THREE HELOC ESTIMATES

Shopping around lets you compare costs and

features, so you can feel condent you’re making the

best choice for your situation.

OFFER A OFFER B OFFER C

» Up-front charges, including points

» Early termination fee

» Closing costs

During the draw period

» Interest and principal payments

» Interest-only payments?

» Fully amortizing payments

» Annual fee (if applicable)

» Transaction fee (if applicable)

» Inactivity fee

» Prepayment and other penalty fees

During the repayment period

» Penalty for overpayments?

» Fully amortizing payment amount?

» Balloon repayment of full balance owed?

» Renewal available?

» Renancing of balance by lender?

» Conversion to xed-term loan?

10 HOME EQUITY LINES OF CREDIT

My best HELOC offer is:

How variable interest rates work

Home equity lines of credit typically involve

variable rather than xed interest rates.

A variable interest rate generally has two parts:

the index and the margin.

An index is a measure of interest rates generally

that reects trends in the overall economy

Different lenders use different indexes in their

loans. Common indexes include the U.S. prime

rate and the Constant Maturity Treasury (CMT)

rate. Talk with your lender to nd out more about

the index they use.

The margin is an extra percentage that the lender

adds to the index.

Lenders sometimes offer a temporarily discounted

interest rate for home equity lines—an introductory

or teaser rate that is unusually low for a short

period, such as six months.

Rights and responsibilities

Lenders are required to disclose the terms and

costs of their home equity lines of credit. They

need to tell you:

• Annual percentage rate (APR)

• Information about variable rates

• Payment terms

• Requirements on transactions, such as

minimum draw amounts and number of draws

allowed per year

• Annual fees

• Miscellaneous charges

You usually get these disclosures when

you receive a loan application, and you get

additional disclosures before the line of credit is

opened. In general, the lender cannot charge a

nonrefundable fee as part of your application until

three days after you have received the disclosures.

If the lender changes the terms before the loan is

made, you can decide not to go forward with it,

and the lender must return all fees. There is one

exception: the variable interest rate might change,

and in that case if you decide not to go ahead with

the loan, your fees are not refunded.

Lenders must give you a list of HUD-approved

housing counselors in your area. You can talk

to counselor about how HELOCs work and get

free or low-cost help with budgeting and money

management.

Right to cancel (also called right to rescind)

If you change your mind for any reason, under

federal law, you can cancel the credit line in the

rst three days. Notify the lender in writing within

the rst three days after the account was opened.

The lender must then cancel the loan and return

the fees you paid, including application and

appraisal fees.

TIP

Some HELOCs let you convert some of your

balance to a xed interest rate. The xed interest

rate is typically higher than the variable rate, but

it means more predictable payments.

12 HOME EQUITY LINES OF CREDIT HOW HELOCS WORK 13

If something changes during

the course of the loan

HELOCs generally permit the lender to freeze or

reduce your credit line if the value of your home

falls or if they see a change for the worse in your

nancial situation. If this happens, you can:

• Talk with your lender. Find out the reason

for the freeze or reduction. You might need

to check your credit reports for errors that

might have caused a downgrade in your

credit. Or, you might need to talk with your

lender about a new appraisal on your home

and make sure the lender agrees to accept a

new appraisal as valid.

• Shop for another line of credit. If another

lender offers you a line of credit, you may be

able to use that to pay off your original line

of credit. Application fees and other fees

may apply for the new loan.



WELL DONE!

For most people, a home is their most

valuable asset. A HELOC can help you

make the most of this asset, when you

understand the ins and outs and know

what to expect.

14 HOME EQUITY LINES OF CREDIT HOW HELOCS WORK 15

In this booklet:



ASK YOURSELF

Have I considered other sources of money

and loans, besides a HELOC?

Have I shopped around for HELOC features

and fees?

Am I comfortable with the worst-case

scenario, where I could lose my home?



ONLINE TOOLS

CFPB website

cfpb.gov

Answers to common questions

cfpb.gov/askcfpb

Tools and resources for home buyers

cfpb.gov/owning-a-home

Talk to a HUD-approved housing counselor

cfpb.gov/nd-a-housing-counselor

Submit a complaint

cfpb.gov/complaint

Last updated 08/22