If you’ve owned your home for several years, there’s a good chance you’ve built significant equity. A home equity line of credit, commonly called a HELOC, can allow you to access some of that equity without selling your home or replacing your existing mortgage.

That’s an important distinction.

If you currently have a low mortgage rate, you may not want to refinance your entire mortgage just because you need $30,000, $50,000 or even $100,000 for another purpose. A HELOC can potentially allow you to leave your existing first mortgage in place while borrowing against a portion of your available home equity.

Homeowners use HELOCs for everything from home improvements and debt consolidation to large purchases and unexpected expenses.

But a HELOC works differently from both a traditional mortgage and a credit card, so it’s important to understand how the loan works before deciding whether it makes sense.

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What Is a HELOC?

HELOC stands for Home Equity Line of Credit.

Instead of receiving one fixed loan amount that you immediately begin repaying, a HELOC generally provides a revolving credit line secured by your home.

Think of it somewhat like a credit card backed by your home’s equity.

You may be approved for a credit line up to a certain amount. You can then borrow from that line when you need the money, repay some or all of what you’ve borrowed, and potentially access the available credit again during the HELOC’s draw period.

For example, suppose you’re approved for a $75,000 HELOC.

You might initially use $20,000 for a kitchen renovation.

That doesn’t necessarily mean you’re paying interest on the entire $75,000 credit line. Generally, interest is charged on the amount you’ve actually borrowed.

If you later repay part of that balance, that credit may become available to use again during the draw period, subject to the terms of your HELOC.

That’s what makes a HELOC different from many traditional home loans.

How Does a HELOC Use Your Home Equity?

Your available home equity plays a major role in determining how large of a HELOC you may qualify for.

Home equity is essentially the difference between your home’s current value and the amount you still owe against it.

For example:

Estimated home value: $400,000
Current mortgage balance: $200,000

You have approximately $200,000 in gross home equity.

That does not mean a lender will necessarily allow you to borrow the entire $200,000.

HELOC lenders generally limit the total amount of debt secured by the property relative to its value. This is commonly measured using combined loan-to-value, or CLTV.

Your existing mortgage plus the proposed HELOC are considered together when calculating CLTV.

Different lenders and HELOC programs can allow different maximum CLTVs, so there isn’t one universal equity requirement that applies to every homeowner.

What Is the Difference Between LTV and CLTV?

These two terms sound similar but mean slightly different things.

Loan-to-value (LTV) compares an individual mortgage balance with the value of the property.

Combined loan-to-value (CLTV) looks at multiple loans secured by the property together.

Suppose your home is worth $500,000.

You owe $250,000 on your first mortgage and want a $100,000 HELOC.

Your combined mortgage debt would be:

$250,000 + $100,000 = $350,000

Your approximate CLTV would therefore be:

$350,000 ÷ $500,000 = 70% CLTV

The maximum CLTV allowed will depend on the lender, your credit profile, occupancy, property type and other underwriting factors.

Does a HELOC Replace Your Current Mortgage?

Usually, no.

This is one of the biggest reasons homeowners consider a HELOC.

A HELOC is commonly placed behind your existing first mortgage as a second lien against the property.

Your first mortgage remains in place with its existing balance, interest rate and payment terms.

You then have a separate HELOC.

This can be particularly valuable for homeowners who obtained very low mortgage rates in previous years.

For example, imagine you owe $250,000 on a mortgage with a 3.25% interest rate but need $60,000 for a major home renovation.

Replacing the entire $250,000 first mortgage with a new cash out refinance at today’s mortgage rates may not make financial sense.

A HELOC could potentially allow you to borrow the additional $60,000 while leaving that 3.25% first mortgage untouched.

Later on this page, we’ll compare a HELOC directly with a cash out refinance and home equity loan.

What Is the HELOC Draw Period?

Most HELOCs are divided into two stages:

The draw period
and
the repayment period.

During the draw period, you can generally borrow money from the available credit line as needed.

A common HELOC structure might have a draw period lasting several years, although the exact term varies by lender.

During this period, you may be able to:

  • Borrow from the line
  • Repay borrowed funds
  • Borrow again against available credit
  • Make required payments based on the HELOC’s terms

Some HELOC programs may allow interest-only payments during portions of the draw period, while others may require principal and interest.

The exact payment structure is important to understand before opening the line.

What Happens When the HELOC Draw Period Ends?

Once the draw period ends, the HELOC generally enters its repayment period.

At that point, you typically can no longer continue borrowing from the credit line.

Instead, the outstanding balance must be repaid according to the loan’s repayment terms.

This can result in a higher required monthly payment than the homeowner was making during the draw period, particularly if the earlier payments were primarily or entirely interest.

That’s why you shouldn’t evaluate a HELOC based only on its initial payment.

You should understand both:

What will I pay during the draw period?

and

What could I pay during the repayment period?

before choosing the loan.

Are HELOC Interest Rates Fixed or Variable?

Many HELOCs have variable interest rates.

Rather than locking one interest rate for the entire life of the loan, the HELOC rate may be based on an underlying index plus a lender margin.

If that index changes, your HELOC interest rate and payment can change as well.

That means your payment could increase even if you haven’t borrowed additional money.

Some HELOC products may offer options to convert portions of the outstanding balance to a fixed rate, but availability and terms vary by lender.

If predictable monthly payments are important to you, this is something you’ll want to discuss before selecting a HELOC.

Who Can Qualify for a HELOC in Michigan?

Qualifying for a HELOC involves more than simply having equity in your home.

Depending on the lender and program, underwriting may consider factors including:

  • Your home’s value
  • Existing mortgage balance
  • Requested HELOC amount
  • Combined loan-to-value
  • Credit history and credit score
  • Income and employment
  • Debt-to-income ratio
  • Property type
  • Occupancy
  • Overall financial profile

There isn’t one credit score, DTI or CLTV requirement that applies to every HELOC program.

One lender may approve a scenario that another lender won’t.

That’s one of the advantages of working with a mortgage broker who can compare different lending options rather than assuming one lender’s HELOC guidelines represent the entire market.

How Much Can You Borrow With a HELOC?

The amount you may be able to borrow with a HELOC depends primarily on your home’s value, the amount you already owe against the property, and the lender’s maximum combined loan-to-value guidelines.

Your credit, income, debt-to-income ratio and overall financial profile can also affect the amount for which you qualify.

For example, suppose:

Home value: $500,000
Current mortgage balance: $250,000
Proposed HELOC: $100,000

After adding the HELOC, the total debt secured by the property would be $350,000.

That would result in a 70% combined loan-to-value ratio.

Another homeowner with the same $500,000 home but a $400,000 first mortgage would have considerably less available equity to work with.

This is why the value of the home alone doesn’t determine how much you can borrow.

If you’re considering using your equity toward another home purchase, understanding how much equity you may need to buy another home before selling can help you determine whether a HELOC or another financing strategy may work.

How Are HELOC Payments Calculated?

HELOC payments depend on the specific terms of the credit line and whether you’re in the draw period or repayment period.

During the draw period, some HELOCs may allow payments based primarily on the interest charged on the outstanding balance. Other programs may require principal and interest payments.

Because many HELOCs have variable interest rates, the required payment can also change when the interest rate changes.

Suppose you have a $100,000 HELOC but have only borrowed $30,000.

Your payment would generally be based on the $30,000 outstanding balance rather than the entire $100,000 credit limit.

If you later borrow another $20,000, your outstanding balance increases to $50,000 and your payment would adjust accordingly.

Once the draw period ends and repayment begins, payments may increase because you’re now required to repay the outstanding principal over the remaining term.

Do You Need an Appraisal for a HELOC?

Maybe.

The lender needs to determine the value of your property because your available equity is a major component of the HELOC approval.

However, that doesn’t always mean a traditional full appraisal will be required.

Depending on the lender, property and requested credit line, the property valuation may be completed using:

  • A traditional appraisal
  • An automated valuation model
  • A desktop or alternative valuation
  • Another lender-approved valuation method

If a full appraisal is required, an appraiser will generally evaluate the property and recent comparable sales to determine an opinion of market value.

The valuation ultimately used by the lender can affect the amount of equity available for the HELOC.

What Are the Closing Costs on a HELOC?

HELOC closing costs vary considerably between lenders and programs.

Potential costs can include items such as:

  • Property valuation or appraisal
  • Credit report
  • Title-related charges
  • Recording fees
  • Origination or lender fees
  • Annual or maintenance fees
  • Early closure fees, depending on the program

Some lenders advertise HELOCs with little or no upfront closing costs.

That doesn’t necessarily mean the loan has no costs.

The lender may absorb certain expenses, price them into the loan, or require you to reimburse certain costs if the HELOC is closed within a specified period.

When comparing HELOC offers, look beyond the initial cost and compare the interest rate, margin, fees, draw period, repayment period and any early termination provisions.

What Can You Use HELOC Funds For?

HELOC funds can generally be used for a wide variety of purposes.

Common uses include:

  • Home improvements
  • Remodeling or renovations
  • Debt consolidation
  • Emergency expenses
  • Major purchases
  • Education expenses
  • Medical expenses
  • Investment in a business
  • Large planned expenses

Having access to the line doesn’t mean you have to use all of it.

For some homeowners, simply having an available line of credit provides additional financial flexibility.

However, because your home secures the HELOC, borrowing should still be approached carefully. Using home equity converts part of the ownership value you’ve built in your property into debt.

Using a HELOC for Home Improvements

Home improvements are one of the most common reasons homeowners consider a HELOC.

A revolving line can be particularly useful for renovation projects because construction expenses often occur over time rather than all at once.

Instead of borrowing $75,000 immediately, for example, you might draw:

$15,000 for the initial deposit,

another $20,000 as construction progresses,

and additional funds later as materials and contractors need to be paid.

You’re generally borrowing only the amount you actually need at each stage.

Improvements may also increase the value or functionality of the home, although homeowners shouldn’t assume that every dollar spent on renovations will result in an equal increase in property value.

Using a HELOC for Debt Consolidation

Some homeowners use their equity to consolidate higher-interest debt.

For example, someone carrying credit card balances at significantly higher interest rates might use HELOC funds to pay off those balances.

This could potentially reduce the interest rate being paid on that debt and simplify monthly payments.

But there’s an important tradeoff.

Credit card debt is generally unsecured. A HELOC is secured by your home.

Using home equity to consolidate debt therefore moves that debt onto your property.

It also doesn’t solve the underlying problem if the credit cards are paid off and then charged back up again.

Debt consolidation can be useful when it’s part of a larger financial plan, but the interest rate alone shouldn’t determine whether it’s a good decision.

Is HELOC Interest Tax Deductible?

Sometimes, but not automatically.

The tax treatment of HELOC interest depends on current tax law and how the borrowed money is used.

Homeowners should not assume that interest is deductible simply because the HELOC is secured by their home.

If the potential tax treatment is important to your decision, discuss your specific situation with a qualified tax professional.

HELOC vs. Home Equity Loan

A HELOC and a home equity loan both allow homeowners to borrow against their equity, but they work differently.

A HELOC generally provides a revolving credit line. You can borrow as needed during the draw period and generally pay interest based on the outstanding balance. HELOC rates are commonly variable.

A home equity loan generally provides the money as a lump sum. The borrower then repays that amount through scheduled payments over a specified term. Home equity loans commonly provide more predictable payments when structured with a fixed interest rate.

A HELOC may make more sense when you don’t know exactly how much money you’ll need or when you’ll need it.

A home equity loan may be more attractive when you know the exact amount you want to borrow and prefer a more predictable repayment structure.

HELOC vs. Cash Out Refinance

A cash out refinance works very differently.

With a cash out refinance, your existing mortgage is replaced with a new, larger mortgage. The difference between the new loan amount and the amount required to pay off the existing mortgage is generally provided to you as cash, after applicable costs and adjustments.

A HELOC usually leaves your existing first mortgage alone and adds another lien against the property.

This distinction can be extremely important.

Suppose you owe $250,000 on a first mortgage with a 3% interest rate and need $50,000.

A cash out refinance could require replacing the entire $250,000 mortgage with a new loan at current market rates just to access the additional $50,000.

A HELOC could potentially allow you to keep the existing first mortgage and borrow the $50,000 separately.

On the other hand, if your existing mortgage rate is already relatively high, refinancing the entire mortgage while accessing equity might make more sense.

Neither option is automatically better.

The right comparison is based on the total cost of both strategies, not simply which loan has the lowest advertised rate.

HELOC vs. Mortgage Refinance

A traditional mortgage refinance replaces your existing mortgage with a new mortgage.

Homeowners may refinance to lower their interest rate, change the loan term, move between loan types or restructure their mortgage.

A HELOC serves a different purpose.

Instead of replacing the first mortgage, you’re generally adding access to your home equity while leaving the existing mortgage intact.

This is why homeowners with favorable first-mortgage rates may be particularly interested in a HELOC.

If you don’t need to access equity and simply want to improve the terms of your existing mortgage, refinancing may be the more relevant option.

HELOC vs. Credit Card or Personal Loan

A HELOC may offer a lower interest rate than many unsecured credit cards or personal loans because the debt is secured by real estate.

But that lower rate comes with an important difference.

Your home is collateral.

Failing to repay unsecured debt can have serious financial consequences, but failing to meet the obligations of debt secured by your home can ultimately put the property at risk.

That makes a HELOC potentially powerful, but it also means homeowners should be thoughtful about what they’re borrowing for and how they plan to repay it.

Should You Use a HELOC as an Emergency Fund?

Some homeowners establish a HELOC while their finances are strong so they have access to additional funds if an unexpected expense occurs later.

That can provide flexibility, but a HELOC shouldn’t necessarily be viewed as a guaranteed permanent emergency fund.

The terms of the line are governed by the loan agreement, and access to available credit can be subject to circumstances permitted under that agreement and applicable law.

A traditional cash emergency fund and a HELOC serve different purposes.

For some homeowners, having both can provide additional financial flexibility.

What Credit Score Do You Need for a HELOC?

There is no single minimum credit score that applies to every HELOC.

Credit requirements vary by lender and program. In general, stronger credit can improve your chances of qualifying and may help you receive more favorable terms.

Lenders may review more than just the numerical credit score. Your overall credit history can also matter, including:

  • Recent late payments
  • Mortgage payment history
  • Credit card balances
  • Collections or charge-offs
  • Bankruptcy or foreclosure history
  • Amount of available revolving credit
  • Recent credit inquiries

If your credit isn’t perfect, that doesn’t necessarily mean a HELOC is impossible. It may simply affect which programs are available, how much you can borrow and the terms you’re offered.

What Debt-to-Income Ratio Do You Need for a HELOC?

Your debt-to-income ratio, or DTI, compares your monthly debt obligations with your qualifying monthly income.

For example, lenders may consider your:

  • First mortgage payment
  • Proposed HELOC payment
  • Auto loans
  • Student loans
  • Credit card payments
  • Other qualifying monthly debts

The acceptable DTI varies by lender and the overall strength of the application.

Instead of assuming you must be below a specific percentage, it’s better to evaluate the entire loan scenario.

Someone with strong credit, substantial equity and significant reserves may present a very different risk profile from someone with the same DTI but limited equity and weaker credit.

What Income Do You Need to Qualify for a HELOC?

There isn’t one minimum income requirement for every HELOC.

The lender generally needs to determine that you have sufficient qualifying income to support your existing obligations and the proposed HELOC.

Depending on your situation, qualifying income could potentially include:

  • Salary or hourly income
  • Overtime
  • Bonuses
  • Commissions
  • Self-employment income
  • Retirement or pension income
  • Social Security income
  • Rental income
  • Other eligible income sources

How income is documented and calculated depends on the type of income and the lender’s guidelines.

Having substantial equity by itself doesn’t necessarily mean you’ll qualify. A HELOC is still a mortgage obligation, so mortgage underwriting typically considers your ability to repay the debt.

Can Self-Employed Homeowners Get a HELOC?

Yes, self-employed homeowners may be able to qualify for a HELOC.

The main difference is usually how income is documented and calculated.

Traditional HELOC programs may review personal and business tax returns or other financial documentation to determine qualifying income.

Depending on the lender, alternative documentation programs may also be available for borrowers whose tax returns don’t accurately reflect their current cash flow.

Being self-employed does not automatically prevent you from accessing your home equity.

Can You Get a HELOC on a Second Home or Investment Property?

Potentially.

HELOC availability for second homes and investment properties depends heavily on the lender.

Programs for non-owner-occupied properties may have different requirements for:

  • Maximum CLTV
  • Credit
  • Reserves
  • Loan amount
  • Property type
  • Pricing

Owner-occupied primary residences generally have the broadest range of HELOC options, but that doesn’t mean other property types are automatically excluded.

Can You Get a HELOC on a Condo?

Yes, condos may be eligible for HELOC financing.

The lender may evaluate both the borrower and the property, and requirements can vary depending on the condominium and the HELOC program.

If you own a condo and have built substantial equity, it’s worth checking available programs rather than assuming your property isn’t eligible.

Can You Have a HELOC and a Mortgage at the Same Time?

Yes. In fact, that’s how many HELOCs are structured.

Your existing first mortgage remains in place and the HELOC becomes an additional lien against the property.

You would then generally have two separate obligations:

Your first mortgage
and
your HELOC.

Each can have its own balance, interest rate, payment and loan terms.

Can You Get a HELOC if Your House Is Paid Off?

Yes.

If you own your home free and clear, you may still be able to establish a HELOC against the property.

Because there isn’t an existing first mortgage balance consuming part of your equity, you may have substantial equity available.

However, you still need to meet the lender’s credit, income, property and other qualification requirements.

And once you borrow from the HELOC, your previously debt-free property will now secure that debt.

What Happens to a HELOC if You Sell Your House?

Because the HELOC is secured by the property, it generally must be addressed when the home is sold.

At closing, the outstanding HELOC balance is typically paid from the sale proceeds along with the existing first mortgage and other applicable liens.

After those obligations and transaction costs are paid, the remaining proceeds belong to the seller.

If you’re planning to sell your home soon, consider whether opening a new HELOC makes sense given the costs and terms of the line.

What Happens to a HELOC if You Refinance Your Mortgage?

This is an important issue that homeowners sometimes overlook.

If you later refinance your first mortgage, the existing HELOC can affect the transaction because both loans are secured by the property.

Depending on the situation, the HELOC may need to be:

  • Paid off and closed
  • Paid down
  • Refinanced
  • Subordinated behind the new first mortgage

Subordination means the HELOC lender agrees to keep its lien behind the newly refinanced first mortgage.

Whether that’s allowed depends on the HELOC lender and the refinance transaction.

If you think you may refinance your first mortgage in the near future, it’s worth discussing this before opening a HELOC.

Can You Pay Off a HELOC Early?

Generally, you can pay down or pay off a HELOC ahead of schedule.

However, the specific agreement matters.

Some programs may have early closure or recapture provisions, particularly when the lender paid certain closing costs to establish the line.

There’s also a difference between paying the balance to zero and actually closing the HELOC.

A HELOC with a zero balance may remain open and available during the draw period unless you formally close the account.

Review the specific terms before opening or closing a HELOC.

Can a HELOC Rate Go Up?

If your HELOC has a variable interest rate, yes.

The rate can move as the underlying index changes according to the terms of your agreement.

That means a HELOC that initially has an attractive payment could become more expensive later.

Before choosing a variable-rate HELOC, understand:

  • How the rate is determined
  • How frequently it can adjust
  • The lender’s margin
  • Any applicable rate caps
  • How rate changes affect your payment

Don’t evaluate a HELOC solely based on the starting rate.

What Are the Risks of a HELOC?

The flexibility of a HELOC is one of its biggest advantages, but that flexibility can also create risk.

Your home is collateral

A HELOC isn’t an unsecured credit line. Your property secures the debt.

Interest rates can change

With a variable-rate HELOC, rising rates can increase your borrowing costs and required payment.

Payments can increase later

The transition from the draw period to the repayment period can result in a significantly different payment structure.

Easy access can encourage unnecessary borrowing

Just because you have a $100,000 line doesn’t mean you should spend $100,000.

You’re reducing your available home equity

Borrowing against the home increases the debt secured by the property.

Understanding these risks doesn’t mean a HELOC is a bad financial tool. It means it should be used with a clear purpose and repayment strategy.

When Might a HELOC Make Sense?

A HELOC may be worth considering when you:

  • Have substantial equity in your home
  • Want to keep your existing first mortgage
  • Have a favorable rate on your current mortgage
  • Need access to money over time rather than all at once
  • Are planning home improvements
  • Want a revolving source of funds
  • Have higher-interest debt you’re considering consolidating
  • Understand that the interest rate may change
  • Have a realistic plan for repaying what you borrow

One particularly strong use case is a homeowner with a low-rate first mortgage who needs access to equity but doesn’t want to replace the entire mortgage with a higher-rate loan.

When Might a HELOC Not Make Sense?

A HELOC may be less attractive if:

  • You expect to sell the home very soon
  • You don’t have much available equity
  • A variable interest rate makes you uncomfortable
  • You need predictable payments
  • You’re borrowing primarily to support ongoing spending you can’t otherwise afford
  • You would be better served by a different loan structure
  • You don’t have a clear repayment strategy

The fact that you qualify for a HELOC doesn’t automatically mean you should open one.

The purpose of the money matters.

HELOC Frequently Asked Questions

Is a HELOC a second mortgage?

Often, yes.

If you already have a first mortgage, a HELOC is commonly recorded as an additional lien against the property.

If the home is owned free and clear, the lien position may be different.

Do I have to use all of my HELOC?

No.

A major advantage of a HELOC is that you’re generally able to access funds as needed during the draw period, up to your available credit limit and subject to the terms of the line.

Do I pay interest on money I haven’t borrowed?

Generally, interest is based on the outstanding amount you’ve actually borrowed rather than the entire unused credit limit.

Always review the specific HELOC agreement.

Can I use a HELOC to pay off credit cards?

Yes, HELOC funds may potentially be used for debt consolidation.

However, you’re converting unsecured debt into debt secured by your home, so the decision should involve more than simply comparing interest rates.

Can I use a HELOC to remodel my house?

Yes. Home renovations and improvements are common uses for HELOC funds.

The revolving structure can be particularly helpful when project expenses occur over several months.

Can I use a HELOC to buy another property?

HELOC proceeds may potentially be used toward the purchase of another property, subject to the terms of the HELOC and requirements of the financing used for the new purchase.

For homeowners planning to move, there are also several ways to buy a new home before selling your current home, depending on your equity, income and overall financial situation.

Can I have more than one HELOC?

Potentially, but lien position, available equity and lender guidelines become important. Having sufficient equity doesn’t automatically mean a lender will approve another line.

Does opening a HELOC affect my credit?

Applying for and opening a HELOC can affect your credit profile, and the account and payment history may be reported to the credit bureaus.

How long does it take to get a HELOC?

Timing varies by lender and transaction.

Income documentation, title work, property valuation and underwriting can all affect how quickly the HELOC is ready to close.

Can I refinance a HELOC?

Potentially.

Depending on your circumstances, you may be able to replace an existing HELOC with another HELOC, a home equity loan, a cash out refinance, or another appropriate financing structure.

Is a HELOC better than a cash out refinance?

Neither is automatically better.

If you have an extremely favorable first-mortgage rate, preserving that mortgage and adding a HELOC may be attractive.

If your existing mortgage rate is high or you want one mortgage payment instead of multiple obligations, a cash out refinance may deserve consideration.

The right answer comes from comparing the numbers for both strategies.

How to Choose Between a HELOC, Home Equity Loan and Refinance

Before deciding how to access your equity, start with four questions:

How much money do you need?

Do you need all of it immediately or over time?

What interest rate do you currently have on your first mortgage?

How important is payment predictability?

Then compare the available options.

A HELOC provides flexibility and can preserve your existing first mortgage.

A home equity loan can provide a lump sum with a more predictable repayment structure.

A cash out refinance can consolidate the borrowing into a new first mortgage.

And sometimes the best choice is simply leaving the equity alone.

The goal isn’t to choose the product with the most attractive advertisement. It’s to determine which financing structure makes the most sense for what you’re trying to accomplish.

HELOC Options in Michigan

Home equity can be an incredibly useful financial resource, but accessing it creates new debt secured by your home.

At BrightSide Lending, we can help you evaluate your available equity, existing mortgage, credit and financial goals to determine which options may make sense.

We’ll help you compare a HELOC, home equity loan, cash out refinance and traditional mortgage refinance so you can understand the differences before making a decision.

If keeping your current mortgage makes sense, we’ll tell you.

If replacing it makes more sense, we’ll explain why.

And if accessing your equity doesn’t make financial sense at all, we’ll tell you that too.

Contact BrightSide Lending to learn if a HELOC is right for you.

More Than a Mortgage. A Brighter Tomorrow.