Best HELOC Lenders of 2023

How a HELOC works

A HELOC works similarly to a credit card: You’re able to borrow up to a certain limit as needed, rather than taking out a lump sum all at once. The lender uses your home’s value to set the HELOC limit, and they’ll let you borrow a percentage of what you own. You may borrow during a draw period that lasts for several years and pay interest only on the balance. After the draw period ends, you may no longer take money out, and you pay the principal plus interest.

To obtain the best HELOC rates, make sure you comparison shop, preferably among at least three lenders. By shopping around, you're likely to find the combination of features and interest rate that make the best home equity line of credit for your needs.

» MORE: Understanding home equity lines of credit

Pros and cons of HELOCs

A HELOC's main advantage is that it offers flexibility. During the draw period, the minimum monthly payment covers just the interest on the balance, so you don't have to pay principal if you don't want to.

A HELOC can have a variable interest rate, which means it can go up or down over time. When the interest rate rises, the minimum monthly payment may increase, too. Less commonly, some lenders offer a fixed-rate HELOC option, meaning that you can lock in some or all of the loan balance at a specific APR.

There are two major disadvantages to a HELOC: The interest rate can rise, and you can get in over your head if you're not careful. You may end up borrowing so much that you can't comfortably afford the principal and interest during the repayment period.

HELOCs typically have lower interest rates than credit cards. But defaulting on a HELOC could put your home at risk of foreclosure.

» MORE: Pros and cons of HELOCs and home equity loans

Alternatives to HELOCs

A HELOC is not your only option for tapping your home's equity. If you know exactly how much you need to borrow, you may consider a home equity loan, which you receive as a lump sum and pay back at a fixed rate.

» MORE: Best home equity loan lenders

If you need to borrow more money than you'd qualify for with a HELOC or home equity loan, a cash-out refinance may be the right choice for you. This replaces your original mortgage with a larger one, and you receive the difference between the value of the loan and the amount you currently owe in cash.

» MORE: Best lenders for a cash-out refinance

Finally, if you cannot qualify for a HELOC, a shared appreciation agreement may be worth exploring. This transaction allows you to sell off a stake in your future equity earnings to a company in exchange for an advance on some of your current equity. This type of agreement is typically for homeowners with a lot of equity but little cash reserves, and most consumers are better served by a HELOC if they can get one. You risk losing out on equity profits by mortgaging the future value of your home, so think carefully before choosing this option.

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