For homeowners
A home equity line of credit lets you borrow against your home as you need the money, while the mortgage you already have stays where it is. Before how, Samantha asks why.
The short answer
A HELOC is a revolving line of credit secured by your home. You draw what you need during a draw period, pay interest on what you have drawn, then repay the balance over a repayment period, usually at a variable rate. It sits behind your first mortgage instead of replacing it. Align places standalone HELOCs through multiple wholesale lenders, so you can see more than one lender's terms.
How it works
The draw period. You can borrow up to your limit, repay, and borrow again. The CFPB's example draw period is 10 years. Some plans allow interest-only payments during the draw; others require some principal.
The repayment period. When the draw ends, borrowing stops and the balance is repaid on your agreement's schedule. The CFPB notes payments are often significantly higher then. Some plans require the whole balance at once, as a balloon payment.
Variable payments. Most HELOC rates are a public index, such as the prime rate, plus a margin the lender sets. When the index moves, your payment moves. Your disclosures must state the maximum rate the line can reach. Some lines let you fix the rate on part of the balance, usually higher than the variable one.
Three ways to borrow against your home:
| HELOC | Home equity loan | Cash-out refinance | |
|---|---|---|---|
| How the money comes | Draw as needed | One lump sum | One lump sum |
| Your first mortgage | Stays in place | Stays in place | Replaced by a new, larger loan |
| Rate | Usually variable | Generally fixed | Fixed or variable |
| Cost disclosure | Home equity disclosures and the CFPB HELOC booklet | Loan Estimate | Loan Estimate |
Each lender sizes a line from your home's value, its own limit on everything borrowed against the home, and your income and debts. Those limits vary by lender, so nothing here is a commitment to lend.
Before you apply
Know the tradeoffs
In Michigan
Working with Align
"Why. That's my first question. What are we using the money for?" Once I understand the reason, I put a line of credit next to a fixed home equity loan and a cash-out refinance, from multiple wholesale lenders, so you can see the tradeoffs side by side. If the honest answer is to leave your equity alone for now, I'll tell you that.
Start with the why
Samantha's first question on equity is why. The answer changes which option fits.
Official sources
Program rules change. These are the official pages this page was checked against.
If yours is not here, ask it on the call. There are no dumb questions.
Yes. A standalone HELOC is a separate loan that sits behind your first mortgage, so that loan, its rate and its term stay as they are. Only what you draw is priced on the line's terms. A cash-out refinance is the option that replaces your first mortgage, so compare all three before you choose.
It depends on the lender. Each one sets a limit on the total of all loans against your home, measured against its value, then subtracts what you already owe. Your credit, income and debts decide how much of that you are offered. Limits vary by lender, credit and property type, so no number is real until a lender approves your line.
No. A HELOC is open-end credit, so you get the lender's home equity disclosures and the CFPB's HELOC booklet instead. When you apply through a broker, they can arrive within three business days. No one may charge a nonrefundable application fee until three business days after you receive them. A fixed home equity loan does come with a Loan Estimate.
It can be. The IRS says interest on home equity loans and lines is deductible only when the money is used to buy, build or substantially improve the home that secures the loan, and other limits apply. Paying off credit cards with a line does not meet that test. Ask a tax professional about your own return.
For a line on your principal home, yes. Federal law gives you three business days after the account opens to cancel in writing. The lender must then cancel the line and return the fees you paid, including application and appraisal fees. Read the disclosures before you sign, so those three days are a safety net rather than the plan.
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Individual experiences. Results vary.
Tell Samantha what you are trying to do, and she will tell you what actually matters in your situation. If the answer is that you should wait, she will say that too.
Not what product you want. What you are actually trying to accomplish.
A licensed Align loan officer works out what matters most for you specifically.
Your options, the tradeoffs, and your next step. No obligation to go further.
Align Lending LLC, NMLS #2041154, is a mortgage broker. Samantha Shelton, NMLS 1647301. Equal Housing Opportunity. Licensed in Michigan, Ohio, North Carolina, Florida, Louisiana and Texas. Program guidelines on this page are general and change over time, and terms vary by lender; they are not a credit decision, a preapproval, a commitment to lend, or an offer of credit. Approval depends on your full application, the property and the lender's current guidelines.
Thinking about a HELOC? Tell me what the money is for and I'll lay out your options.
Samantha Shelton · Broker Owner · NMLS 1647301
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