Consumer Financial
Protection Bureau
An ofcial publication of the U.S. government
WHAT YOU SHOULD KNOW ABOUT
Home Equity
Lines of Credit
(HELOC)
Borrowing from the
value of your home
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
specied 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 condent
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
2 HOME EQUITY LINES OF CREDIT COMPARE A HELOC TO OTHER MONEY SOURCES 3
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.
TIP
Renting your home out to other people may be
prohibited under the terms of your line of credit.
MONEY SOURCE
HOW MUCH CAN YOU
BORROW
VARIABLE
OR FIXED
RATE
IS YOUR
HOME AT
RISK?
TYPICAL
ADVANTAGES
TYPICAL
DISADVANTAGES
HELOC
You borrow against
the equity in your
home
Generally a
percentage of the
appraised value
of your home,
minus the amount
you owe on your
mortgage
Variable.
typically
Yes Continue
repaying and
borrowing for
several years
without additional
approvals or
paperwork
Repayment amount
varies; repayment is
often required when
you sell your home
SECOND
MORTGAGE OR
HOME EQUITY
LOAN
You borrow against
the equity in your
home
Generally a
percentage of the
appraised value
of your home,
minus the amount
you owe on your
mortgage
Fixed Yes Equal payments
that pay off the
entire loan
If you need more
money, you need to
apply for a new loan;
repayment is often
required when you
sell your home
CASH-OUT
REFINANCE
You replace your
existing mortgage
with a bigger
mortgage and take
the difference in cash
Generally a
percentage of the
appraised value
of your home; the
amount of your
existing loan plus
the amount you
want to cash out
Variable
or xed
Yes Continue to make
just one mortgage
payment
Closing costs are
generally higher;
it may take longer
to pay off your
mortgage; interest
rate may be higher
than your current
mortgage
PERSONAL LINE OF
CREDIT
You borrow based on
your credit, without
using your home as
collateral
Up to your
credit limit, as
determined by the
lender
Variable,
typically
No Continue repaying
and borrowing
for several years
without additional
approvals or
paperwork
Solid credit is
required; you may
need to pay the
entire amount due
once a year; higher
interest rate than a
loan that uses your
home as collateral
4 HOME EQUITY LINES OF CREDIT COMPARE A HELOC TO OTHER MONEY SOURCES 5
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
LOAN
You borrow from your
retirement savings
in a 401(k) or similar
plan through your
current employer
Generally, up
to 50% of your
vested balance
or $50,000,
whichever is less
Fixed No Repay through
paycheck
deductions;
paperwork
required but no
credit check and
no impact on your
credit score
If you leave or lose
your job, repay the
whole amount at
that time or pay
taxes and penalties;
spouse may need to
consent
HOME EQUITY
CONVERSION
MORTGAGE (HECM)
You must be age 62
or older, and you
borrow against the
equity in your home
Depends on your
age, the interest
rate on your loan,
and the value of
your home
Fixed or
variable
Yes You don’t make
monthly loan
payments—
instead, you
typically repay the
loan when you
move out, or your
survivors repay it
after you die
The amount you owe
grows over time;
you might not have
any value left in your
home if you want to
leave it to your heirs
CREDIT CARD
You borrow money
from the credit card
company and repay
as you go
Up to the amount
of your credit limit,
as determined by
the credit card
company
Fixed or
variable
No No minimum
purchase;
consumer
protections in the
case of fraud or
lost or stolen card
Higher interest rate
than a loan that
uses your home as
collateral
FRIENDS AND
FAMILY
You borrow money
from someone you
are close to
Agreed on by
the borrower and
lender
Variable,
xed or
other
No Reduced waiting
time, fees, and
paperwork
compared to a
formal loan
Forgiven loans
and unreported or
forgiven interest can
complicate taxes,
especially for large
loans; can jeopardize
important personal
relationships if
something goes
wrong
6 HOME EQUITY LINES OF CREDIT HOW HELOCS WORK 7
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 renancing 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.
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 condent 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
$
10 HOME EQUITY LINES OF CREDIT
My best HELOC offer is:
GET THREE HELOC ESTIMATES
Shopping around lets you compare costs and
features, so you can feel condent 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?
» Renancing of balance by lender?
» Conversion to xed-term loan?
12 HOME EQUITY LINES OF CREDIT HOW HELOCS WORK 13
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 reects 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.
14 HOME EQUITY LINES OF CREDIT HOW HELOCS WORK 15
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.
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
