Over the past several years, a new crop of credit cards has emerged on the market, catering to cash-strapped but equity-rich homeowners.
The companies backing these cards present a unique proposition to consumers: Get all the rewards, perks and benefits of a credit card but with the low rates and terms that come with financing backed by your property with a home equity line of credit (HELOC) card.
This type of product operates much like any other credit card — except it’s secured by the value of your home, like a traditional HELOC. This means the issuer can have a claim to your home if you fail to repay. But because home loan products are less risky than other types of debt, these cards typically have lower rates and a higher credit limit than other credit cards on the market.
More money for less may seem like a no-brainer, but the card’s structure, convenience, terms and securitization may make it riskier than other credit card products, where your home isn’t on the line. Below, CNBC Select outlines what you need to know about this nascent product type and some issuers leading the way.
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What is a HELOC?
A HELOC is a revolving line of credit backed by the value of your home.
With this type of financing product, you can pull from the line as much as you need — up to the maximum limit — during the draw period, which typically lasts 10 years. You’ll make interest-only payments on what you take out during this time, but won’t need to pay down the principal amount monthly.
Once the draw period is over, you can no longer pull from the line, and repayment starts. This typically lasts 20 years.
Unlike other lines of credit, your home is used to secure the money you withdraw. That means that if you fail to make your payments on time, your lender could force you into foreclosure.
Traditional HELOC requirements
Here’s what lenders typically require to get a HELOC:
- Credit score: 620 to 680 and higher
- Debt-to-income ratio: 43%
- Minimum equity: 15% to 20%
How is a HELOC card different from a traditional HELOC?
The biggest difference between a HELOC card and a traditional HELOC is their disbursement methods and structures.
With a typical HELOC, the amount you withdraw from your available credit is wired into your bank account or via a check. However, with a HELOC card, you can access your line of credit directly through your card. You can also almost always access cash from a traditional HELOC at no fee, unlike many HELOC cards.
In many cases, HELOC cards also have shorter draw periods than traditional HELOCs, meaning you’ll have less time to draw from the line of credit and you’ll start repaying sooner.However, with a traditional HELOC, you won’t get rewards for spending as you do with some HELOC cards.
Overall, HELOC cards may be more convenient and offer more rewards than traditional HELOCs. However, cards usually offer shorter draw periods and include fees that make it pricier to get cash.
Pros and cons of using a HELOC card over a traditional HELOC
Pros
- A card may make it more convenient to use
- Unlike a traditional HELOC, you can earn rewards when you spend using the HELOC
Cons
- Typically, HELOC cards have shorter draw periods than traditional HELOCs
- You may have to pay a fee to access cash with the card
- A credit card could lead to overspending
3 HELOC cards to consider
Best for high credit limits: Aven Home Equity Visa® Card
Who’s this for? If you’re looking for the most amount of borrowing power, the Aven Home Equity Visa® Card offers credit limits of up to $400,000. Just know that hazard insurance is required for accounts with credit limits over $100,000.
Other great perks: Aven offers a foreclosure protection guarantee for accounts with $10,000 or less in outstanding balances (and a credit score of 700+) if you happen to lose your job. The card also earns rewards of two points per $1 spent on all purchases when AutoPay is on; otherwise, you earn 1.5 points per $1.
Aven Home Equity Visa® Card
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Loan types
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Minimum credit score
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Maximum loan-to-value
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Annual Fee
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APR
6.49% to 14.99% for primary residences
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Home equity limits
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Terms
5, 10, 15, 20 or 30 years
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Availability
Aven is available in 43 states. Does not lend in Hawaii, Massachusetts, Missouri, Nevada, New York, South Carolina, Texas and Washington, D.C.
Pros
- States it will fund line of credit in three days, a much shorter fund timeline than other lenders, meaning you’ll be able to access cash as soon as possible
- Offers 2% cashback when using your card (with autopay on)
- Remote closing so you can tap into your home equity from your couch
- Offers a longer repayment period
- Provides Foreclosure Protection
Cons
- Only available in 39 states
- No in-person option
- 2.5% transfer fee
Best for earning rewards on home purchases: Trovy HELOC Card
Who’s this for? If you’re looking to make some changes around the house with your HELOC funds, the Trovy HELOC Card earns 2 points per $1 spent on home categories (plus 1 point per $1 spent elsewhere). This includes things like home improvement stores, home services merchants, utilities and insurance payments and more.
Other great perks: Cardholders can receive a statement credit of up to $25 per quarter for eligible home services purchases, or up to $100 per year. Those who hit Trovy’s premium tier (by spending $24,000 within 12 months) will have this credit doubled to up to $50 per calendar quarter, or $200 per calendar year. You can apply online within minutes, and within four days, you could have access to your funds.
Trovy HELOC Card
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Loan types
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Minimum credit score
680 for credit lines above $50,000
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Maximum loan-to-value
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APR
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Home equity limits
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Terms
Initial draw period of 5 years, which may be renewed up to 3 additional 5-year periods, to a maximum of 20.
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Availability
The Trovy HELOC Card is available in 27 states: AL, AR, AZ, CA, CO, FL, IA, ID, IL, IN, KS, MI, MN, MS, NC, NE, NJ, NM, OH, OK, OR, PA, TN, UT, VA, WA, and WI.
Pros
- Access your funds in as few as 4 days
- 2% cash back on home purchases, 1% on everything else
- Only one monthly payment
- 100% online
Cons
- Not available in the majority of states
- No in-person option
- HELOC draw period renewal is at Trovy’s discretion
Best for long draw periods: Navy Federal Credit Union Home Equity Credit Card
Who’s this for? The Navy Federal Credit Union Home Equity Credit Card is a great option for those looking to use their home equity over a long timeframe, as it offers a draw period of up to 20 years, with an additional 20-year repayment period.
Other great perks: The NFCU Home Equity Credit Card comes with travel protections like Roadside Dispatch®, Auto Rental Collision Damage Waiver and Worldwide Travel and Emergency Assistance Services.
Should you use a HELOC card over another credit card?
The biggest difference between HELOC cards and traditional credit cards is that a HELOC card is backed by the value of your home, while other credit cards are not.
Because of this, you can get a lower rate with a HELOC card than you would with any other credit card. But this also means that the lender can force you into foreclosure if you fail to make payments, something that won’t happen with a credit card.
In addition, the line of credit will probably be much larger with a HELOC card than it otherwise would be with a typical credit card.
Pros and cons of using a HELOC card over other credit cards
Pros
- You’ll likely have a lower APR
- Your line of credit will probably be larger
Cons
- You can lose your home if you fail to make on-time payments
- You lose equity in your home as soon as you open the line
- Traditional credit cards typically offer stronger purchase protections
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