What's a HELOC?

A Home Equity Line of Credit, or HELOC, is a revolving line of credit that is secured by your home. A HELOC works much like a credit card. You can use up to your maximum line amount during your draw period (up to 10 years). Accessing your line of credit is easy: whenever you need extra funds, simply initiate a bank transfer, write a HELOC check, or use your HELOC-card for shopping. Payments are calculated based on the outstanding line balance each month. And, you can always pay off your outstanding balance at any time.

How does a HELOC work?

Your maximum line amount is based on the amount of equity you have in your home, your creditworthiness, and your debt-to-income ratio. Typically, HELOCs have a 20-25 year term with two distinct phases: 1) the initial draw period which can last up to 10 years, and 2) the repayment period which can last 10-15 years.

TERM: HELOCs usually have a 20-25 year term, which is the total duration of your draw period + your repayment period.

INTEREST RATE: The interest rate on a HELOC is usually variable, which means it may be adjusted over time.

DRAW PERIOD: During the draw period, you can use up to your maximum line amount, and you may also make interest-only payments, which can result in a lower monthly payment. Your draw period may last up to 10 years.

Please note that paying the minimum monthly amount may not fully repay the outstanding principal on your HELOC. Once the repayment period ends, any unpaid balance, interest, and fees must be paid in one final balloon payment. 

REPAYMENT PERIOD: During the repayment period, you can no longer draw on your line, and you must start paying back any outstanding balance plus interest. Your repayment period may last up to 15 years.

What can I use a HELOC for?

You can use your funds for a variety of things, including home improvements, debt consolidation, major purchases (appliances, cars, RVs, boats, etc.), refinancing your existing mortgage, and even miscellaneous expenses.

Is a HELOC secured or unsecured?

HELOCs are secured by your home. This means that your home is collateral should you be unable to make your monthly payments.

How much equity is required for a HELOC?

If your home is valued at $300,000 and you owe $200,000 on your first mortgage, your current equity is $100,000. 

If you take out a HELOC, you need to have equity equal to 10-20% of your property value ($30,000-$60,000) remaining. Therefore, you could borrow between $40,000 to $70,000 depending on your creditworthiness and debt-to-income ratio.

$100,000 (current equity) - $40,000 (HELOC amount) = $60,000 (20% of property value)

$100,000 (current equity) - $70,000 (HELOC amount) = $30,000 (10% of property value)

How does a HELOC affect my credit score?

Your HELOC appears on your credit report as a revolving line of credit. However, what matters most is how you manage your HELOC. Maxing out your line of credit, missing payments, or making payments late can have a negative impact on your score.

Can I get a HELOC if I have a mortgage?

Yes, provided that you’ve had your mortgage for at least 1-2 years and have built up enough equity in your home to borrow against.

See How much equity is required for a HELOC? for additional details.

Can I get a HELOC if I have an FHA loan?

Yes, you can apply for a HELOC on the Prosper platform if you have an FHA loan.