Home Equity Line of Credit
Written by True Tamplin, BSc, CEPF®
Updated on January 11, 2021
A home equity line of credit, or HELOC, is a line of credit that is secured by the equity in your home.
A line of credit is like a credit card, except that it usually has more stringent payment rules.
A HELOC generally offers favorable terms in exchange for the added securitization.
Home Equity Line of Credit Requirements
Typical requirements for a home equity line of credit are:
- Equity in for of at least 15% to 20% of home’s total value
- Debt-to-income ratio between 40% and 50%
- Credit score of at least 620
- Strong history of paying bills on time
Individual requirements will vary by lender, but these are common qualifications.
How Does a Home Equity Line of Credit Work?
A home equity line of credit, or HELOC, is a line of credit that is secured by the equity in your home.
The equity in your home is its value minus any amount owed. By securing the LOC with your home, you can generally get more favorable terms, but you risk losing your home if you default.
Is Home Equity Line of Credit Tax Deductible?
Home equity line of credit (HELOC) interest is not tax deductible unless used for purposes that directly and substantially maintain or improve the borrower’s home that was borrowed against.
Pure cosmetic changes are likely not tax deductible.
This has been the case since 2017, since the Tax Cuts and Jobs Act was passed.
Home Equity Line of Credit FAQs
Line of Credit (LOC) Definition
What Is a Line of Credit?
A Line of Credit, or LOC, is money lent to an individual or business which the borrower pays interest on.
Depending on the type of LOC, the client either receives a lump sum, or is allowed to “draw against”their line of credit to make purchases, until the credit limit is reached.
Typically lines of credit are given by banks, such as when an individual is issued a credit card.
What Is a Line of Credit and How Does it Work? Revolving vs Non-Revolving
Lines of credit will either remain open, or will close, once the loan has been repaid.
Revolving lines of credit are considered “revolving”because an individual’s credit is replenished when some or all of the outstanding debt has been paid off.
In contrast, a non-revolving line of credit is closed once the account is fully paid off, such as a student loan or mortgage.
Non-revolving credit usually has a lower interest rate.
How does a Line of Credit Work? Secured vs Unsecured
Loans may be unsecured loans, or secured by collateral.
A home equity loan is an example of a collateralized loan, whereby the home is the collateral and will be claimed by the creditor in the event of a default on the loan.
Credit card loans are almost always unsecured, which causes creditors to take on more risk and is why credit card interest rates are generally higher and the borrowing limits are generally lower than secured loans.