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 the money you can borrow is tied to how much equity you have built up in your home. Instead of receiving a lump sum upfront, you get access to a credit line. You draw from it when you need money, pay interest only on what you actually borrow, and can borrow again as you repay — all during a set period called the draw period, which typically lasts 5 to 10 years.

Your lender calculates your available credit by taking your home's current market value, subtracting what you still owe on your mortgage, and then lending you a percentage of that difference — often 80 to 90 percent. If your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. A lender might offer you a HELOC of $70,000 to $80,000 based on that equity.

The HELOC is secured by your home, which means if you stop paying, the lender can foreclose. This is why HELOCs typically carry lower interest rates than credit cards or personal loans — the lender's risk is lower because they have a claim on your property.

Key Takeaways

  • A HELOC gives you access to a credit line based on your home's equity, and you only pay interest on the money you actually borrow.
  • During the draw period (usually 5 to 10 years), you can borrow, repay, and borrow again; after that, the repayment period begins and you can no longer draw new funds.
  • Interest rates on HELOCs are usually variable, meaning your monthly payment can increase or decrease as market rates change.
  • Your home secures the debt, so failure to repay can result in foreclosure.
  • You will need to meet income and credit requirements, and your lender will order an appraisal to confirm your home's value and your equity.

The draw period: when you can borrow and how much you pay

During the draw period, you access your credit line on your own schedule. 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 only owe interest on the amount you have actually drawn, not on your full credit limit.

Many lenders require you to make interest-only payments during the draw period. If you have a $50,000 HELOC and have drawn $20,000 at a 7 percent interest rate, you would owe roughly $140 per month in interest alone. You are not required to pay down the principal during this phase, though you can. Some HELOCs allow you to make principal payments voluntarily, which reduces the amount you owe and the interest you accrue.

The draw period length varies by lender but commonly runs 5, 7, or 10 years. Once that period ends, the repayment period begins, and you can no longer draw new funds. At that point, your payment structure changes.

The repayment period: when you must pay back what you borrowed

When the draw period ends, the HELOC enters the repayment period, typically lasting 10 to 20 years. You can no longer draw new money. Instead, you must repay the full balance you borrowed, plus interest, in monthly installments.

Your payment jumps significantly at this transition because you are now paying both principal and interest. If you drew $30,000 during the draw period and made only interest payments, you still owe the full $30,000 when repayment begins. Your lender calculates a new monthly payment that will pay off that balance over the repayment period. This shock — sometimes called payment shock — catches many borrowers off guard, which is why understanding the timeline matters before you open a HELOC.

Some HELOCs allow you to convert your balance to a fixed-rate loan at the start of the repayment period, which locks in your interest rate and payment amount for the remainder of the loan. Others stay variable, meaning your rate and payment can still move with market conditions.

Variable interest rates and how they affect your payments

Most HELOCs carry variable interest rates, which means your rate is tied to a market index — usually the prime rate published by the Federal Reserve. When the prime rate rises, your HELOC rate rises with it. When it falls, your rate falls. Your lender adds a margin (typically 1 to 3 percentage points) on top of the index to set your actual rate.

This creates payment uncertainty. If you draw $25,000 at a 6 percent rate and your payment is $150 per month in interest, a rise to 8 percent means your payment climbs to $200 per month — a 33 percent increase. Over years, rate changes can significantly affect your budget. Some HELOCs include a rate cap, which sets a ceiling on how high your rate can go, but not all do.

A few lenders offer fixed-rate HELOCs or allow you to lock in a fixed rate on part of your balance, but these are less common and may carry slightly higher rates than variable options. If payment predictability matters to you, ask your lender whether fixed-rate options are available.

What you need to may have access to and what the process looks like

To open a HELOC, you must own your home and have built up equity — most lenders require at least 15 to 20 percent equity. You will need to provide proof of income, authorization for a credit check, and permission for the lender to order an appraisal of your home. The appraisal confirms your home's current value and ensures the lender's math on your available equity is correct.

Lenders also review your credit score, debt-to-income ratio, and payment history. A score of 620 or higher is typical, though some lenders require 700 or above. If you have recent late payments, high existing debt, or unstable income, you may be denied or offered a smaller credit line at a higher rate.

The application process usually takes 2 to 6 weeks from start to closing. You will sign loan documents that spell out your draw period length, repayment period length, interest rate structure, any caps or floors on your rate, and fees (which may include an appraisal fee, origination fee, or annual maintenance fee). Read these documents carefully — the terms vary widely between lenders.

Fees and costs you should know about

Beyond interest, HELOCs can carry several fees. An appraisal fee (typically $300 to $700) covers the cost of valuing your home. An origination fee or application fee (usually 0 to 1 percent of your credit limit) covers the lender's processing costs. Some lenders charge an annual maintenance fee of $50 to $150 just to keep the account open, whether you use it or not.

A few lenders charge an inactivity fee if you do not draw funds within a certain period, or a transaction fee each time you access your credit line. Some charge a prepayment penalty if you pay off your balance early, though this is becoming less common. Ask your lender for a full fee schedule before you commit, and compare total costs across lenders — a lower interest rate does not always mean lower total cost if fees are high.

HELOC versus a home equity loan: when each makes sense

A home equity loan is different from a HELOC. With a home equity loan, you receive a lump sum upfront and repay it in fixed monthly payments over a set term, usually 5 to 15 years. Interest rates are typically fixed, so your payment never changes. You pay interest on the full amount borrowed from day one, even if you do not need all the money immediately.

A HELOC makes sense if you have ongoing or uncertain expenses — home renovations that will happen in phases, medical bills, or education costs spread over time. You draw only what you need, when you need it, and pay interest only on what you have drawn. A home equity loan works better if you need a specific amount all at once and want payment certainty. The trade-off is that a HELOC's variable rate creates payment risk, while a home equity loan's fixed rate is predictable but typically higher than a HELOC's starting rate.

Frequently Asked Questions

What happens to my HELOC if my home value drops?

Your lender may freeze or reduce your available credit if your home's value falls significantly. If you owe more than your home is worth, you may not be able to borrow at all. Your existing balance and interest rate usually do not change, but your ability to draw new funds can be affected.

Can I pay off my HELOC early without penalty?

Most HELOCs allow early repayment without penalty, but some charge a prepayment fee if you pay off the balance within a certain window (often the first 3 to 5 years). Check your loan documents or ask your lender before you sign. If early repayment is important to you, choose a lender that does not charge this fee.

What if I cannot afford my payments when the repayment period starts?

Contact your lender as soon as you know you will struggle. Some lenders offer loan modification options, extended repayment periods, or conversion to a fixed-rate loan that might lower your payment. Ignoring the problem can lead to default and foreclosure, so reach out early.

Is the interest I pay on a HELOC tax-deductible?

Interest on a HELOC used to improve your home may be deductible if you itemize deductions on your federal tax return, but rules are complex and have changed. Consult a tax professional about your specific situation — do not assume the interest is deductible.

Can I have more than one HELOC at the same time?

Yes, you can open multiple HELOCs with different lenders as long as your total borrowing does not exceed your available equity and you meet each lender's income and credit requirements. However, managing multiple lines of credit and their different draw and repayment periods can become complicated.