HELOCs offer a sizable chunk of change that can help you accomplish goals like completing home improvement projects or paying off high-interest debt. But how exactly do they work in terms of the application process, draw period, interest calculations, and repayments? Here’s what you should know.
How To Apply for a HELOC
While many banks and credit unions offer HELOCs, the rates, terms, and eligibility requirements will vary from one lender to the next. It’s a good idea to shop around to find at least three HELOC lenders that match your needs, then apply to find out what they’ll offer you. Here’s a look at how the application process works.
Share Your Loan Needs
First, you’ll usually need to share your desired HELOC amount and how you plan to use the funds (e.g., debt consolidation, home renovation)
Share Your Personal Information
Next, just like with any loan, you’ll need to provide the lender with personal information. For example, your name, address, phone number, citizenship status, marital status, and Social Security number. You’ll also need to share your employment status and income information.
Share Your Property Information
A HELOC is secured by a home, so the lender will want to know about your collateral. Be ready to provide your:
Property addressPurchase dateOriginal purchase priceHow the property is used (primary residence, secondary residence, etc.)Mortgage payment amountOutstanding mortgage balanceProperty taxesHomeowners insurance
Lenders may also have questions such as whether you have flood insurance, if you pay HOA fees, and if there’s a homestead right on the property. They need to get a full understanding of your property’s value.
Submit Your Application for Review
Once you’ve provided all the required information, you’ll submit it for verification and review. At this point, the lender will usually check your credit. From there, you’ll be able to review your loan options.
How To Qualify for a HELOC
What does it take to qualify for a HELOC? Here are some of the common requirements:
Sufficient home equity: A minimum amount of equity is required, which may be a minimum dollar amount or a minimum equity percentage. For example, PenFed’s minimum HELOC amount is $25,000, so you would need to have at least $25,000 in available equity. On the other hand, Rocket Mortgage recommends you own at least 15%-20% of your home before applying.Low debt-to-income (DTI) ratio: Your DTI ratio can’t be too high. For example, at PenFed, you must have a DTI of 50% or less.To figure out yours, divide your monthly debts by your monthly income.Stable income: Lenders also look for a stable source of income to prove you’ll be able to repay the HELOC without difficulty.Good credit score: Lenders will review your credit report and score. The higher your score and fewer missed payments you have, the easier it will be to get approved.
Save time by doing a little research before applying, to find out if you meet a lender’s eligibility requirements. Make sure they are a match in terms of credit score requirements, credit line amounts, DTI, income, and home equity requirements.
Drawing on Your Home Equity With a HELOC
The draw period is the window of time when you’re allowed to withdraw money from your HELOC. It often ranges from five to 10 years. You can continue to make withdrawals until you hit your credit limit or your draw period ends. If you hit your limit but still have time left, you’ll need to pay off a portion of the balance before you can borrow more. But how do you actually get access to the money from the credit line? Common methods include via:
CheckOnline bank transferVisit to a branchCredit card linked to the HELOC
As for the time it takes to get your funds, it will depend on the lender and the withdrawal methods available. For example, some banks enable free, same-day transfers to your checking account while others may take a week to mail you a check.
How Is HELOC Interest Calculated?
HELOC interest is often calculated each day by multiplying your outstanding daily balance by 1/365th of your annual percentage rate (APR)—known as the daily periodic rate. The HELOC interest formula is as follows: Outstanding HELOC balance x Daily periodic rate = Interest owed per day The interest costs per day are then added up each month and sent to you in your monthly statement. If you aren’t sure what your APR is, you can check your latest statement or contact your bank to request it.
HELOC Interest Example
Let’s say you qualify for a $100,000 HELOC with a 3.59% APR. You withdraw the full $100,000 and don’t repay any of it off during the first month. Your interest cost per day would be the 3.59% APR divided by 365, which gives you a 0.00983562% daily periodic rate. Then, you would multiply your outstanding balance ($100,000) by the daily periodic rate to figure out how much you owe per day ($9.84). If there were 30 days in the current month, your interest charges at the end of the month would be $295.20.
Can I Repay My HELOC Early?
If you repay your balance during the draw period, it will stop you from accruing more interest charges and will make your credit line available again—just like a credit card. Once the repayment period begins, you can also usually pay off the balance early to save on interest, but your credit line will no longer be reinstated. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
