Introduction

A Home Equity Line of Credit (HELOC) allows you to leverage the equity in your home as collateral for a revolving credit line. While HELOCs can be valuable financial tools, there are several common misconceptions about how they work. Let’s clarify these myths so you can make an informed decision about whether applying for a HELOC is the right move for you.

Myth 1: HELOC Approval Is Guaranteed

Many people believe that having equity in their home guarantees HELOC approval. However, this is not the case.

Fact: Qualifying for a HELOC Depends on Multiple Factors

While your home equity is a crucial factor, lenders also consider other elements such as your credit score, verified income, and debt-to-income ratio (DTI). Generally, you need a credit score between 680 and 720, a stable income, and a DTI below 43% to qualify. Requirements can vary by lender, so it’s wise to shop around for the best terms.

Myth 2: You Need to Wait Years to Borrow a HELOC

Some believe that you must wait several years before you can qualify for a HELOC.

Fact: There Is No Set Waiting Period for a HELOC

While some lenders have waiting periods, others do not. The key is having sufficient equity in your home. If you’ve made a large down payment or your home’s value has increased, you might qualify for a HELOC sooner than you think.

Myth 3: You Can’t Deduct Interest Payments on a HELOC

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced changes that suspended deductions for interest payments on home equity loans and HELOCs from 2018 to 2025.

Fact: Interest Might Be Deductible Depending on How You Spend Loan Proceeds

You can still deduct HELOC interest if you use the funds to buy, build, or substantially improve your primary or second home. For example, using a HELOC to upgrade your kitchen or add a new bedroom may qualify for interest deductions.

Myth 4: HELOCs and Home Equity Loans Are the Same

HELOCs and Home Equity Loans (HELs) are often confused, but they are different financial products.

Fact: HELOCs and HELs Are Different Types of Loans

A HELOC is a revolving line of credit, similar to a credit card, allowing multiple draws. In contrast, a HEL is an installment loan with a fixed amount and repayment schedule. HELOCs usually have variable interest rates, while HELs often have fixed rates.

Myth 5: You Always Need a Full Home Appraisal

Many believe that a full home appraisal is always required to qualify for a HELOC.

Fact: HELOCs Often Require an Appraisal, but Not Necessarily a Full One

While some lenders require a full appraisal, others may accept a drive-by, desktop, or automated valuation appraisal. These alternatives can be quicker and less expensive.

Myth 6: You’ll Have to Pay Closing Costs out of Pocket

Concerns about upfront costs can deter people from applying for a HELOC.

Fact: HELOCs Don’t Always Have Closing Costs

Some lenders cover closing costs or split them with borrowers. If closing costs are required, they can often be rolled into the HELOC, eliminating the need for out-of-pocket expenses.

Myth 7: Your HELOC’s Credit Limit Is Guaranteed

Many assume that their HELOC’s credit limit is fixed as long as the account is in good standing.

Fact: Lenders Can Freeze Your HELOC or Lower Its Credit Limit

Lenders can freeze or reduce your HELOC’s credit limit if your home’s value significantly declines or if they believe you may have trouble making payments.

Should You Get a HELOC?

HELOCs offer flexible funding options and may have relatively low interest rates. They can be useful for home improvements, debt consolidation, or other necessary expenses. However, it’s essential to understand that HELOC amounts, rates, and credit limits are not guaranteed, and variable interest rates can be costly if they increase.

At O1ne Mortgage, we are committed to helping you navigate your mortgage needs. If you’re considering a HELOC, contact us at 213-732-3074 to explore your options and find the best solution for your financial situation.