How to Choose the Right Lender for Your HELOC


A home equity line of credit, also called a HELOC, is a type a revolving account that uses your home’s equity as collateral. A HELOC gives you access to cash when you need it, and you can use funds for a variety of purposes. Some people use a home equity line of credit to pay off debt, make home improvements or cover the cost of their kid’s college education. Typically, you can borrow up to 80% of your equity.

But while a home equity line of credit is an option for mortgage borrowers, you shouldn’t get a HELOC from any bank. Here are a few tips to help you choose the right lender for your HELOC.

 What is the draw period?

 A home equity line of credit isn’t a traditional loan, so you don’t receive a lump sum or have fixed monthly payments. Instead, you can draw money from your line of credit on an as-needed basis.

HELOCs have a draw period and a repayment period. The time frame varies by lender, but you’re typically allowed to draw from the home equity line of credit for up to 10 years and you have 20 years to pay back what you’ve borrowed.

 If your plans include using your HELOC over several years for items such as home improvements, make sure the lender offers a draw period that gives you sufficient time to access the account.

 Is there a minimum withdrawal requirement?

 When choosing a lender for your HELOC, you should also inquire about minimum withdrawal requirements. Some lenders penalize borrowers for not using their lines of credit and charge a fee if a withdrawal isn’t completed within a specific period.

 Minimum withdrawal requirements are dangerous because they force you to take money you don’t need. Every withdrawal taken from the HELOC reduces the amount of equity in your home. Unnecessary withdrawals mean unnecessarily depleting your equity.

 What is the interest rate?

 Many home equity lines of credit have a variable interest rate that can change from month-to-month or year-to-year. It’s important to shop around and get the lowest rate possible. Therefore, you can pay the least amount of interest and enjoy affordable monthly payments.

 Your interest rate has everything to do with your credit score, so do whatever you can to improve your score before applying for a HELOC. This includes paying off other types of debt like credit card debt. You should also pay your bills on time and dispute any negative errors on your credit report.

 As you compare different interest rates offered by different lenders, ask about rate caps. Since your interest rate can fluctuate, it pays to work with a lender that offers a cap. This can protect you from skyrocketing rates in the future.

 Is there a prepayment penalty?

 Similar to certain types of mortgage loans, some HELOCs have a prepayment penalty. In this case, the lender charges a fee if you cancel or close the HELOC early. Some borrowers are okay with the prepayment penalty because they don’t intend on selling their homes within the penalty period. If you know you’ll move in the next five to seven years, however, choose a lender that doesn’t charge this fee, or else you’ll end up paying more for your HELOC in the long run.