A HELOC is a revolving credit line secured by your home's equity

A HELOC (home equity line of credit) works like a credit card, but instead of borrowing against a credit limit, you borrow against the equity you have built in your home. The lender looks at your home's current value, subtracts what you still owe on your mortgage, and lets you borrow up to a percentage of that difference — typically 80 to 90 percent of your equity. You can draw money when you need it, repay it, and draw again, all during an initial period that usually lasts 10 years.

The lender holds a second mortgage on your home as security. This means if you stop paying, the lender can foreclose and sell your house to recover what you owe, just as your primary mortgage lender could. Because your home backs the loan, HELOCs typically carry lower interest rates than credit cards or personal loans, but the risk to you is higher — you are putting your house on the line.

Key Takeaways

  • A HELOC lets you borrow against your home's equity and draw money as needed during a 10-year draw period, then repay over a longer term.
  • Interest rates on HELOCs are usually variable, meaning your monthly payment can rise or fall as market rates change.
  • You only pay interest on the money you actually draw, not on the full credit line available to you.
  • If you cannot repay a HELOC, the lender can foreclose on your home, so a HELOC is riskier than unsecured debt like credit cards.
  • HELOCs have an initial draw period (usually 10 years) when you can borrow, followed by a repayment period (usually 10 to 20 years) when you cannot draw new money.

The draw period: how you access the money

During the draw period, which typically lasts 10 years, you can borrow money whenever you want up to your credit limit. You might write a check, use a debit card linked to the account, or request a transfer to your bank account — the exact method depends on your lender. You are not required to borrow the full amount at once or even at all. If you have a $100,000 HELOC and only need $20,000 right now, you draw $20,000 and leave the rest available.

During the draw period, you typically pay interest only on the money you have actually borrowed, not on the full line of credit. If you borrowed $20,000 and paid back $5,000, you would owe interest only on the remaining $15,000. This is different from a home equity loan, where you receive a lump sum upfront and pay interest on the whole amount from day one.

Interest rates and how payments work

Most HELOCs carry variable interest rates, meaning the rate changes over time based on market conditions. Your rate is usually tied to a benchmark like the prime rate, plus a margin the lender adds. When the prime rate rises, your rate rises and your monthly payment increases. When it falls, your payment decreases. Some lenders offer a fixed-rate option for part or all of the borrowed amount, but this typically costs more upfront.

During the draw period, many lenders let you pay interest only, so your monthly payment stays low. A $20,000 draw at 8 percent interest might cost you $133 per month in interest-only payments. This is attractive in the short term, but it means you are not reducing what you owe. When the draw period ends and the repayment period begins, your payment jumps because you now have to repay the principal as well as interest, usually over 10 to 20 years.

The repayment period: when the payment shock hits

After the draw period ends — typically after 10 years — the HELOC enters the repayment period. You can no longer draw new money. Instead, you must repay what you borrowed, plus interest, over the remaining term, which is usually 10 to 20 years. This is when many borrowers face payment shock. If you have been paying $133 per month in interest-only payments on a $20,000 balance, your payment might jump to $200 or $250 per month once you have to repay principal.

If you have a large balance remaining when the repayment period begins and your variable rate has risen, the payment increase can be severe. Some borrowers refinance into a fixed-rate loan or home equity loan to avoid this shock, but that requires going through the lending process again and may not be an option if your home's value has fallen or your credit has weakened.

How the lender decides your credit limit

The lender starts by ordering an appraisal of your home to determine its current market value. They then calculate your equity by subtracting your current mortgage balance from that value. If your home is worth $400,000 and you owe $250,000 on your mortgage, your equity is $150,000. Most lenders will let you borrow up to 80 or 85 percent of that equity, which would be $120,000 to $127,500 in this example.

The lender also reviews your credit score, income, and debt-to-income ratio. A higher credit score and lower debt load usually mean a higher credit limit and a lower interest rate. If you have missed payments, have high credit card balances, or your income has dropped, the lender may offer a smaller line or decline you altogether. The appraisal and credit review typically take two to four weeks.

Costs and fees to expect

HELOCs usually have lower upfront costs than home equity loans, but they are not free. Expect to pay an appraisal fee (typically $300 to $500), an application fee, and possibly a title search or title insurance fee. Some lenders charge an annual fee to maintain the line of credit, even if you do not draw any money. A few charge a fee if you close the account within a certain period, usually three to five years.

Interest rates vary by lender and your creditworthiness, but HELOC rates are typically 1 to 3 percentage points higher than your primary mortgage rate. If your mortgage is at 6 percent, your HELOC might be at 7 to 9 percent. Because the rate is variable, it can rise further if market rates increase. Read the disclosure documents carefully to understand all fees and the terms under which your rate can change.

HELOC versus home equity loan: which is which

A home equity loan is different from a HELOC in one key way: you receive all the money upfront as a lump sum, and you repay it over a fixed term (usually 5 to 15 years) at a fixed interest rate. Your payment never changes. A HELOC lets you draw money as needed over time and usually has a variable rate, so your payment can fluctuate.

Home equity loans are better if you know exactly how much you need and want a predictable payment. HELOCs are better if you need money over time — for example, if you are renovating your house in phases or paying for college over several years. Home equity loans typically have lower interest rates because the rate is fixed, but HELOCs offer more flexibility. Both put your home at risk if you cannot repay.

Frequently Asked Questions

Can I use a HELOC for anything I want?

Yes, legally you can use HELOC money for any purpose — home renovation, debt consolidation, education, medical bills, or anything else. However, using a HELOC to pay off credit card debt only makes sense if you then stop using the credit cards, otherwise you end up with both debts. Using a HELOC for non-essential spending is risky because you are borrowing against your home.

What happens if my home's value drops?

If your home loses value, your equity shrinks and the lender may reduce your available credit line or freeze it entirely. During the 2008 housing crisis, many borrowers found their HELOCs frozen when home values fell. You can still repay what you have already borrowed, but you cannot draw new money. This is one reason HELOCs are riskier than fixed-rate home equity loans.

Can I pay off a HELOC early?

Yes, you can repay a HELOC at any time without penalty — most lenders do not charge prepayment fees. Paying it off early saves you interest and reduces your risk. However, once you repay money, you can only redraw it during the draw period. After the draw period ends, the account is closed to new borrowing and you can only repay.

What if I cannot afford the payment when the repayment period starts?

Contact your lender before the payment shock hits. Some lenders will refinance the balance into a fixed-rate loan or extend the repayment term to lower the monthly payment. If you wait until you have missed payments, your options shrink and your credit suffers. Refinancing is easier when you still have equity and a good payment history.

Is a HELOC a good way to build credit?

A HELOC can help your credit if you borrow responsibly and make on-time payments, because it adds to your credit mix and shows you can manage different types of debt. However, it is not a good tool for building credit from scratch — you need existing credit to may have access to. If you are trying to repair damaged credit, a secured credit card is usually a better choice than a HELOC.