Home equity is a powerful financial resource that allows homeowners to leverage their home’s value to access cash. Simply defined, equity is the value you hold in your home. To calculate your home equity, subtract any debt balances owed on the home from the property’s current market value.

This equity can be converted to cash, for example, when you sell the house. Assuming the sale price is more than the remaining mortgage balance, you could pay off the loan balance with the proceeds from the sale and receive the home equity in cash at closing (minus applicable closing costs). 

Of course, some homeowners want the benefit of accessing cash from their home equity without selling. In this case, a home equity line of credit could be useful.

In this article, you can get answers to important questions, including:

  • What is a HELOC?
  • How does a HELOC work?
  • Are HELOCs the same as home equity loans?
  • Are there any downsides to HELOCs?

The information in this article can help you decide if a HELOC is right for you.

HELOC 101 - What Is a HELOC?

A home equity line of credit, commonly called a HELOC, is a tool for borrowing against your home’s value. With a HELOC, your home is used as collateral for a revolving line of credit that you can access and repay as needed. HELOCs can be used to access cash for many different purposes, including:

  • Home renovations
  • Home repairs
  • Education costs
  • Medical expenses
  • High-interest debt consolidation
  • Purchasing or renovating an investment property
  • Down payment funds for a future home purchase
  • Financing a future business opportunity

How Does a HELOC Work?

A HELOC is often compared to a credit card. After opening your HELOC account, you can borrow funds from your HELOC to pay expenses and then repay them, similar to the way credit cards are used. HELOCs come with a maximum limit and you must keep your borrowing below the limit, using draw methods such as a HELOC access card, checks, or online banking. HELOCs also come with a set “draw” period, during which you can borrow funds, and a set “repayment” period, during which no additional draws may be made, and the balance plus interest must be paid off.

Example of a HELOC

Assume a home has a market value of $500,000 and a mortgage balance of $300,000. This gives the homeowner $200,000 in home equity. If the lender allows them to borrow a total of 80% of the home’s value (known as the loan-to-value ratio), the total debt would be limited to $400,000 (80% of $500,000). Because the current mortgage already accounts for $300,000 in financing, $100,000 may be available to borrow as a HELOC. 

The homeowner could potentially access $100,000 as needed during the draw period.  

How Much Can You Borrow with a HELOC?

Each lender has its own formula for calculating maximum limits on home equity lines of credit. Your borrowing limit depends on several factors, including:

  • How much equity you have in the home. The more equity you have, the higher the borrowing limit can be. Many lenders require that homeowners maintain a minimum of 15-20% equity in their homes.[1]
  • Your credit history. The higher your credit score is, the higher the limit could be.
  • Your current debt-to-income (DTI) ratio. Your DTI shows the percentage of your income that is currently allocated to repaying debts. The lower your DTI is, the higher the HELOC limit could be.

HELOC Interest Rates

As with mortgage loans, HELOCs can come with a fixed interest rate or a variable interest rate. 

With a fixed rate, your interest rate is locked in during the term of the loan. With a variable interest rate, your interest rate is tied to the going market rate. This means your rate can rise or fall over time, typically after an introductory period, in which a lower rate may be offered.

Some lenders offer fixed rate locks, which give borrowers the flexibility to "lock" or "unlock" a rate for all or a portion of their line of credit balance. For example, if you have a variable-rate HELOC, you could opt to lock in a fixed rate if you believe rates will rise in the future. This lock would prevent your rate from rising with future market rate increases.    

It is important to understand your HELOC interest rate because it directly affects your borrowing cost.

When interest rates are low and expected to rise, a fixed-rate option could save you money by keeping the interest rate lower while rates rise. However, a fixed-rate HELOC could have a higher interest rate than the starting rate on a variable-rate HELOC, or it could have higher fees or early-payoff penalties.[2] With a fixed-rate HELOC, the lender is taking the risk that they could lose money on your HELOC if interest rates rise, so these potential additional costs would help mitigate that risk for the lender.

Choosing a lender with a fixed rate lock option can provide the flexibility needed to navigate changing interest rates more effectively. 

How Do You Pay Back a HELOC?

While the specific repayment arrangements can vary by lender, paying back your HELOC typically follows a set path.

First, during the designated draw period, when you are free to borrow against your credit line, you may be required to make minimum payments on a monthly basis. In many cases, this minimum payment consists of interest only.[3] This means that your entire payment is going toward interest, and none of the payment is being applied to the balance of the amount you borrowed. During this period, you could opt to make payments toward the principal balance in addition to the interest-only minimums due.

After the draw period comes the repayment period. During this phase, your payments are applied to both principal and interest. It is important to note that your payment amount could increase significantly during this period if the draw period payments were interest-only. This is because you must repay all the money you borrowed plus accumulating interest during the repayment period.[4]

If you need more flexibility regarding repayments, you can discuss a HELOC refinance with your lender. Assuming all eligibility requirements are met, you could potentially reapply for a new PNC HELOC and roll the balance of the existing HELOC into the new line, providing access to additional liquidity with a new draw period.  

How To Qualify for a HELOC

HELOC requirements vary by lender, but applicants typically need the following:

  • Enough home equity. There needs to be enough equity to allow homeowners to cash out a portion of the equity while still retaining a minimum of 15-20% equity in their homes.  
  • Good credit. While the exact credit score needed depends on several factors, lenders often look for scores of 680 or higher.  
  • Fair DTI. The debt-to-income ratio shows that there is enough income to cover all debt obligations, including the new HELOC payments.
  • Proof of income. Pay stubs, W2s, and tax returns are commonly used to confirm income levels.
  • Proof of identity. Expect to provide personal information, such as date of birth and social security number, along with a valid form of photo ID, such as a passport or driver’s license. 
  • Statements relating to the property. You may need to provide a current mortgage statement, property tax bill, and homeowner’s insurance declarations pages, as well as any HOA statements, flood insurance declarations, or other relevant paperwork.

Documents and Information Needed to Apply for a HELOC

HELOC requirements vary by lender, but typically include requests for the following information and documentation:

  • Proof of income
  • Proof of identity 
  • Personal information (date of birth, Social Security number, address, etc.)
  • Employer’s contact information
  • A current mortgage statement
  • Current property tax information
  • The homeowner’s insurance declaration’s page

Additional information and documentation may be required in certain circumstances. For example, if the property is in an HOA (Homeowner’s Association), you may need to provide a current HOA statement.

How HELOCs Affect Your Credit Score

As with any loan or line of credit, a HELOC can affect your credit score in complex ways.

  1. Lenders look into your credit before issuing a loan. This credit inquiry can cause your score to drop by just a few points because it signals that you are looking to increase the amount of debt you have. However, some banks offer a soft credit pull feature to determine your eligibility before entering a full credit application. Soft credit pulls do not affect your credit score.
  2. Immediately upon opening the HELOC, your credit score could dip a bit. This is because new credit lines bring down the average length of your open accounts, which is a factor in your credit score.[5]
  3. As you begin making on-time payments on your HELOC, your credit score could rise because payment history accounts for 35% of your FICO score.[6]

There is one important difference between the way a HELOC affects your credit score compared to the way other revolving credit lines (like credit cards) affect your score. The difference is in the way your credit utilization ratio is calculated. For standard revolving credit lines, keeping a low balance can improve your credit score, while a high balance can lower your credit score. But this is not the case with HELOCs. Because HELOCs are secured, using your home equity as collateral, the amount of the available balance used does not negatively affect your credit score.[7]

Pros and Cons of HELOCs

Before deciding if a home equity line of credit is a good fit for you, you should weigh the pros and cons of HELOCs. 

The benefits of HELOCs include:

  • The ability to borrow only what you need when you need it.
  • Lower interest rates than other revolving credit lines.
  • Higher credit limits than other revolving credit lines.

The potential downsides of HELOCs include:

  • Using your home to secure the loan. When you use your home as collateral for a loan, you risk losing the home to foreclosure if you are unable to repay the loan.
  • Changes in variable interest rates due to market fluctuations can cause payments to increase with little to no warning. Some lenders (including PNC Bank) offer HELOC's with fixed rate lock option to mitigate this risk. 

Are HELOCs and Home Equity Loans the Same Thing?

HELOCs and home equity loans are not the same, but they are similar. Both tools allow homeowners to access cash based on their home equity. Here is a quick overview of home equity loans and how they differ from HELOCs. For a complete explanation of the differences, check out HELOCs vs. Home Equity Loans.

What Is a Home Equity Loan?

A home equity loan is a one-time lump-sum borrowing against the value of your home. Unlike a HELOC, which allows homeowners to borrow against equity as needed during the draw period, a home equity loan consists of a single payout, which is then repaid.

How Does a Home Equity Loan Work?

With a home equity loan, you apply for a set amount. If your loan application is approved, your lender transfers the loan amount to you. Then you begin repaying the principal and interest in monthly installments as scheduled in the home equity loan contract.

Home equity loans are typically fixed-rate.[8] Since you know the amount you can borrow upfront and you know the interest rate, it is easier to calculate the exact amount of your monthly payments with a home equity loan than with a HELOC. The loan documents might even state the payment amount for you so that you can see the amount before agreeing to the loan.

HELOC FAQs

How Do You Access HELOC Funds?

Borrowers can access HELOC funds in a number of ways, including:

  • Checks 
  • Access cards (similar to bank cards) 
  • Branch and ATM cash withdraws (certain limits may apply) 
  • Online transfers to other accounts

Can You Refinance a HELOC?

Yes, it is possible to refinance a HELOC. Additionally, some lenders may allow financially distressed borrowers to use a loan modification to change the terms of their HELOC without refinancing. However, in many cases, a refinance may not be necessary if your lender offers a fixed rate lock option where a borrower can lock in a rate on their HELOC balance based on current market trends. Fixed rate lock options can offer a variety of repayment terms, sometimes up to 30 years. A fee may be associated with exercising the fixed rate lock feature on a HELOC.   

What Fees Are Associated with HELOCs?

HELOC fees vary by state and by lender, but it is common to incur the following:

  • Annual fee: a recurring fee for the administrative maintenance of the HELOC. 
  • Origination fee: a one-time fee paid to establish the new loan.
  • Rate lock/unlock fees: fees charged when a borrower requests that the interest rate be locked at the current rate or unlocked so the rate can fluctuate with market rates. 
  • Late fees: penalties for late payments.
  • Reimbursable fees: fees charged in some states when a borrower closes or cancels the HELOC earlier than agreed to.

Does a HELOC Affect Your Credit Score?

Yes, HELOCs affect your credit score. Typically, there is an initial decline as the new line of credit is opened, followed by an increase as you continue making on-time payments month after month. 

Is a HELOC Right For You?

As with any loan, the decision to open a HELOC should be carefully considered. Being able to turn your home equity into cash can give you the financial freedom to invest in worthwhile ventures or cover expected bills.

Accepting a loan also means taking responsibility for repaying the loan principal plus interest. Before opening a HELOC, make sure you understand the repayment terms and have a plan in place to cover the projected installment payments..

The property securing the CHELOC must be located in a state where PNC offers home equity products. PNC does not offer the CHELOC product in Alaska, Hawaii, Louisiana, Mississippi, Nevada and South Dakota.