A HELOC, or home equity line of credit, allows borrowers to borrow money as needed. They are growing in popularity, driven largely by high homeowner equity and the stabilization of interest rates. Rather than giving up low fixed-rate mortgages, many homeowners are turning to HELOCs to access equity for renovations, consolidate debt and handle other major expenses. HELOCs are ideal when borrowers want to only borrow what they need when they need it.
Island Federal Credit Union is a leading HELOC provider specializing in comprehensive coverage of requirements, processes and protection strategies to ensure our members have the best possible access to their home equity. Read on to learn more about HELOCs, their requirements and how Island Federal can help:
Understanding HELOCs in Today’s Market
A HELOC is a financial product that allows a homeowner to tap into their home’s equity. Equity is the value of your home over and above your existing mortgage loan. If your home, for example, is worth $250,000 and your current mortgage loan balance is $150,000, you may have as much as $100,000 in available equity.
HELOCs represent a more flexible option compared to cash-out refinancing. HELOCs tend to have variable interest rates, meaning they’ll fluctuate based on current economic and market conditions. While HELOC interest rates tend to be higher than typical mortgage rates, they’re often lower than unsecured loan rates. HELOCs tend to be an ideal option for property owners looking for a quick infusion of money at a reasonable rate.
2025 HELOC Requirements: What You Need to Qualify
Qualifications for a HELOC aren’t much different than what you’d need to qualify for any type of loan, as lenders weigh various factors such as your credit score, loan-to-value requirements, debt-to-income ratio, stability of your employment situation and more. Here’s a closer look at the various qualification requirements:
Credit Score Requirements
The better your credit score, the better rate and terms you’re likely to secure on your HELOC — and vice versa. Many lenders require at least a good score (680 and above) to qualify for a HELOC. If your current credit score falls below this range, consider taking time to improve it. Some tips that can help raise your credit score in just a few months include:
- Address any missed payments and ensure you’re paying all bills on time.
- Pay down debt to lower your credit utilization to below 30 percent. You might also request a credit limit increase to improve this ratio and reduce total monthly debt payments.
- Check your credit report for errors and address issues with the three main credit bureaus. It’s estimated that as many as 20 percent of credit reports have some sort of error on them.
Home Equity and Loan-to-Value Requirements
You need to have a certain amount of equity in your home. Equity is the difference between your home’s value and what you owe on the mortgage. Typically, lenders require a combined loan-to-value (CLTV) of 80 to 85 percent. However, Island Federal has programs that can allow home owners to borrow up to 100% of their home’s value.
Appraisal requirements are another important factor in determining your home’s equity. Higher appraisals can increase your borrowing power, while lower ones will decrease it. Appraisals are used to calculate the LTV ratio, using this formula:
- LTV = Current Mortgage Balance/Appraised Value
Income and Debt-to-Income Requirements
You’ll also need to show lenders you have the necessary income stability to qualify for these loans. Lenders expect to see a consistent income source. A stable employment history lacks any big gaps in employment as well.
Typical debt-to-income (DTI) requirements are 43 to 50 percent or lower to qualify. DTI represents the sum of recurring monthly expenses divided by gross monthly income. Lenders value this percentage to ensure you have the necessary means to handle additional debt from the HELOC.
How HELOCs Work in 2025
Like most loans, a HELOC’s fee is in the form of interest. The interest rate is calculated based on your current balance. It is typically calculated on an average daily balance, which is different from an annual percentage rate. Most HELOCs have variable interest rates, which means your payments will fluctuate over time based on market and economic conditions.
A HELOC’s draw period is typically 10 years, where you’ll make only interest-only payments. Following the draw period is the repayment period, meaning you’ll pay back both principal and interest. Repayment periods may extend anywhere from 10 to 20 years.
HELOC vs. Home Equity Loans vs. Cash-Out Refinancing
HELOCs represent a viable alternative to home equity loans and cash-out refinancing based on factors such as loan structure, interest rate, how funds are received and repaid, and their impact on the original mortgage. Here’s a brief guide on when to select each of these options:
- HELOC: You have ongoing or undefined expenses and want to borrow only what you need, when you need it. HELOCs are also ideal if you’re comfortable with a variable interest rate and want to keep your existing mortgage and its interest rate.
- Home equity: Home equity loans are ideal when you need a specific sum of money for a one-time expense. Home equity loans come with fixed rates and predictable monthly payments. They also allow you to keep your existing mortgage at its current rate.
- Cash-out refinancing: Cash-out refinancing is best when you can get a lower interest rate compared to your current mortgage. It’s also ideal if you don’t mind resetting the repayment terms of your entire mortgage to access this sum of money.
Protecting Your HELOC from Fraud
Island Federal specializes in helping you meet HELOC requirements and protecting your HELOC from fraud. Common scams include account takeover fraud and title fraud, underscoring the importance of prioritizing account security. While we empower our Members to protect themselves by carefully monitoring their accounts and educating them against common scams, we also have robust security measures in place to ensure accounts and member information are kept safe and secure.
Some of our specific protection measures include:
- Account monitoring
- Secure check storage
- Alert setup
- Secure online environment
- Data protection
Benefits and Advantages of HELOCs
You can use the funds from a home equity line of credit in any way that fits your needs. Typically, there is no restriction on use. Common uses include home renovations, education expenses or debt consolidation. This flexibility is one advantage of HELOCs over conventional lump-sum alternatives and can help organize monthly debt payments into a plan that reduces interest payments.
Flexibility and Access
Consider how you may use a HELOC:
You meet the HELOC credit score requirements, income requirements and other terms. The lender offers you a $25,000 HELOC. You use the funds initially to remodel your home, adding a new addition to the property, giving you the ability to enjoy your home more fully (and even adding value to it). You can then repay the amount you borrowed over the next several years and borrow more funds when it’s time to get a new roof for your home.
HELOCs function similarly to a credit card, but with lower interest rates and greater flexibility.
Cost Advantages
HELOCs tend to have significantly lower interest rates than credit cards and personal loans. However, rates are variable and may fluctuate based on a number of factors.
While HELOCs can be attractive in the right situations, they’re not always the most cost-effective option. Variable interest rates can fluctuate, resulting in more unpredictable repayment. Borrowers may also be susceptible to a “payment shock” after the draw period when they have to repay principal and interest. If a HELOC doesn’t align with your financial situation, consider an alternative, such as a home equity loan, unsecured personal loan or cash-out refinance after evaluating closing costs and potential changes to mortgage payments.
Special Considerations for 2025
HELOCs are particularly attractive in 2025 for reasons ranging from declining variable interest rates to competitive offerings from lenders, including Island Federal. Some key considerations include:
- Lower interest rates: The Federal Reserve has already cut rates in 2025, and more cuts are expected throughout the rest of the year and into 2026, making borrowing more attractive. In fact, the average HELOC rate has fallen from about 10 percent to below 8 percent.
- Homeowners have record levels of home equity. In fact, as of 2025, the average mortgage-holding homeowner had more than $200,000 in trappable equity relative to their remaining mortgage balance.
- Attractive promotions: Due to increased demand for HELOCs, lenders are becoming more flexible. Promotional rates, more streamlined processes and innovative offers are becoming common with HELOCs.
The Island Federal Advantage
At Island Federal, we work closely with you to ensure you meet the HELOC loan requirements and are in the best situation. With competitive rates, fees and unmatched service quality, we’re here to support our members throughout the entire process. Contact us today for more information about HELOCs to help determine if they’re the best fit for your needs and your personal situation. We’re standing by and ready to help.
Ready to Access Your Home’s Equity? Start Your HELOC Journey Today
Are you ready to tap into your home’s equity? With rates on the decline and market conditions more favorable, now’s the time to apply for a HELOC, and Island Federal is a lender you can trust to ensure you’re in the best possible situation. Contact us today to learn more about HELOCs or stop in to your nearest Island Federal branch for more information and to apply.
Frequently Asked Questions
What credit score do I need for a HELOC in 2025?
Typically, you need a credit score that’s at least in the “good” range of 680 or higher. Though some lenders may accept borrowers with credit scores less than this, keep in mind that the higher your credit score, the more favorable your interest rate and terms are likely to be. If your credit score is on the lower end, consider taking measures to improve it before applying for a HELOC. Some strategies to do this include addressing any missed payments and ensuring you’re paying all bills on time, paying down debt to lower your credit utilization, and checking your credit report for errors and disputing issues accordingly.
How much equity do I need in my home to qualify for a HELOC?
To qualify for a HELOC, most lenders require anywhere from 15 to 20 percent equity in your home. This means your combined loan-to-value (CLTV) ratio should be in the range of 80 to 85 percent. Essentially, the total of your mortgage plus your new HELOC account cannot exceed that percentage of your home’s value.
To find your available HELOC amount, subtract your current mortgage balance from your maximum allowable loan amount.
Can I get a HELOC on a second home or investment property?
Yes. While it is possible to get a HELOC on a second home or an investment property, know that requirements tend to be a bit stricter. Borrowers often need to have an excellent credit score and lower loan-to-value ratios compared to their primary residence. Additionally, lenders often view these properties as riskier than primary residences, so interest rates may be a bit higher.
Know that you can also use funds from a HELOC on your primary residence toward the purchase of a second property.
What should I do if I suspect HELOC fraud on my account?
If you suspect there’s fraudulent activity on your account, immediately contact your lender to freeze the account and get to the bottom of any issue. In some cases, you might file a police report and report any issues to the FTC. In the most dire of cases, you may have to contact the three main credit bureaus and ask them to freeze your credit reports to prevent any further unauthorized activity if your information has been compromised.
How long does the HELOC application process take at Island Federal Credit Union?
In most cases, the application’s underwriting process takes two to three weeks. However, this timeline is largely dependent on various factors, such as your home’s appraisal value and any required documentation that needs to be gathered for consideration. To speed the process as much as possible, make sure you come prepared with all the necessary financial documents. Be sure to respond quickly to any questions or requests for further information if you’re contacted by the lender after submitting your application to further expedite the process.
Can I convert my variable-rate HELOC to a fixed rate?
In some cases, yes. In some situations, you’re able to convert your variable-rate HELOC to a fixed rate by utilizing a fixed-rate option to lock in either a portion or all of the balance of your HELOC. You may also be able to refinance your HELOC into a fixed-rate loan. Contact us today to learn more about how to convert interest rates from variable to fixed.
What’s the difference between a HELOC and a home equity loan?
There are many key differences between HELOCs and home equity loans. Perhaps the biggest difference is that home equity loans are one-time lump sum loans, while HELOCs function more like a credit card, allowing borrowers to take money on an as-needed basis over time. Other key differences include:
- HELOCs tend to offer better interest rates.
- HELOCs have variable interest rates compared to fixed rates of home equity loans.
- HELOCs are best for ongoing expenses, while home equity loans are best for one-time expenses.
Are HELOC payments tax deductible in 2025?
In the 2025 tax year, HELOC payments are only tax deductible if the money is used to buy, build or improve the home that secures the loan. Interest that’s paid on other expenses, like debt consolidation or personal expenses, is not tax deductible. Make sure to keep proper records to prove HELOC funds were used for qualifying purchases.
What happens if my home value decreases after I get a HELOC?
If your home value decreases after receiving a HELOC, the lender may reduce your line of credit. In some cases, they may also freeze your line of credit, which will prevent you from withdrawing any more money. In this case, you’ll still be required to repay the amount that you borrowed. A home value decrease may also require you to pay more if your home’s value falls below a certain threshold.