Home Equity Line of Credit
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 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.
Non-revolving credit usually has a lower interest rate.
How does a Line of Credit Work? Secured vs Unsecured
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.
Using Credit Lines More Responsibly
While a high line of credit can be an indicator of a business’ ability to pay, it is important to be cautious about its risks, too. Learn how you can be more responsible with your credit line by connecting to a financial advisor in Terre Haute, IN. If you live outside the area, please feel free to browse through our financial advisor page instead.
Understanding a Credit Line FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.