Home Equity Line of Credit

The lender approves a credit limit based on your home's value, what you owe and your credit. During the draw period you borrow what you need and repay it, and interest is charged only on the balance you carry. When the draw period ends, you can no longer draw and you repay the balance over the repayment period. Most HELOCs have a variable rate, so the payment can change.

Both borrow against your equity and leave your first mortgage in place. A home equity loan pays you one lump sum, usually at a fixed rate with a fixed payment. A HELOC is a line of credit you draw on as needed, usually with a variable rate. A lump sum fits a single, known cost. A line fits costs that come over time.

It mostly depends on your current rate. A HELOC adds a line of credit behind your existing mortgage, so you keep your first-mortgage rate. A cash-out refinance replaces your mortgage with a larger one, which makes more sense when the new rate is close to or below what you have now.

For a primary residence, a conventional cash-out refinance generally allows up to 80% of the home's value, minus what you owe. Many HELOCs use a similar combined limit, and some go higher. Example: a $700,000 home with $300,000 owed leaves up to $260,000 at 80%.

Lenders look at your equity, credit, income and debt-to-income ratio, and usually order an appraisal or valuation of the home. Requirements differ by lender and by property type, so we compare several to find one that fits.