A HELOC lets you borrow against the equity you have built in your home, then draw that money as you need it

A home equity line of credit (HELOC) is a revolving loan secured by your house. The lender sets a credit limit based on how much equity you own — typically 80 to 90 percent of your home's current value, minus what you still owe on your mortgage. You can then draw money from that limit whenever you want, pay it back, and draw again, similar to a credit card. You only pay interest on the money you actually borrow, not on the full credit limit.

The lender holds a second mortgage on your home as collateral. This means if you stop paying, the lender can foreclose and sell your house to recover what you owe. Because the lender has this security, HELOC interest rates are usually lower than credit card rates, though higher than your primary mortgage rate.

Key Takeaways

  • A HELOC is a line of credit you can draw from repeatedly, secured by the equity in your home, and you pay interest only on money you actually use.
  • Most HELOCs have a draw period (usually 5 to 10 years) when you can borrow, followed by a repayment period when you can no longer draw and must pay back what you owe.
  • Your home serves as collateral, so failure to repay can result in foreclosure.
  • Interest rates on HELOCs are often variable, meaning your monthly payment can change if the market rate changes.

How the draw period and repayment period work

Most HELOCs have two phases. During the draw period — usually 5 to 10 years — you can borrow money whenever you want up to your credit limit. You typically make interest-only payments during this time, so your monthly bill is lower. Some lenders let you pay principal too, but you are not required to.

When the draw period ends, the repayment period begins, usually 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 because you are now paying both principal and interest, and the lender is no longer letting you borrow.

A few lenders offer HELOCs that let you renew the draw period or convert the balance to a fixed-rate loan when repayment begins, but this is not standard. Read your agreement carefully to know what happens when your draw period ends.

Fixed-rate versus variable-rate HELOCs

Most HELOCs carry a variable interest rate, which means your rate is tied to a market index (usually the prime rate) plus a margin the lender adds. When the index moves, your rate moves with it. Your monthly payment can go up or down, sometimes significantly. If rates rise sharply, your payment during the draw period might jump from $200 to $400 a month.

Some lenders offer the option to lock in a fixed rate on part or all of your HELOC balance. This protects you from rate increases but usually comes with a higher interest rate than the variable rate at the time you lock. You may also pay a fee to convert to fixed.

Before you open a HELOC, ask the lender what the current rate is, what index it is tied to, and what the historical range of that index has been. This gives you a sense of how much your payment could swing over time.

What you need to borrow against your home

To open a HELOC, you must own your home and have built up equity — usually at least 15 to 20 percent of the home's current value. The lender will order an appraisal to determine what your home is worth today. They will also pull your credit report, verify your income, and review your payment history on your existing mortgage.

You will need to provide recent pay stubs, tax returns (usually two years), and bank statements showing you have reserves. The lender wants to see that you can afford the payments. If you have missed mortgage payments, have a low credit score, or have little income, you may be denied or offered a smaller credit limit at a higher rate.

The application process typically takes two to four weeks. The lender will order the appraisal, review your documents, and then issue a formal commitment. You will sign closing documents similar to those you signed when you bought your home, and the lender will record a second mortgage against your property.

How interest and payments work during the draw period

During the draw period, you write checks, use a debit card, or transfer money online to access your credit line. Each time you draw, that amount begins accruing interest at your HELOC rate. If you borrow $10,000 at 7 percent variable rate, you owe roughly $58 in interest that first month (though the exact amount depends on how many days are in the billing cycle).

Your monthly payment during the draw period covers the interest you have accrued, and sometimes a small portion of principal. If you borrow $10,000 and make only the minimum payment, you might pay $70 a month — $58 in interest and $12 toward principal. The balance shrinks slowly. If you pay more than the minimum, you reduce the principal faster and pay less interest overall.

Some people use a HELOC like a savings account: they draw money when they need it, pay it back quickly, and draw again. Others draw a lump sum once and treat it like a personal loan. Both approaches work, but the longer money sits borrowed, the more interest you pay.

What happens when the repayment period begins

When your draw period ends, you stop being able to borrow. If you owe $50,000 at that point, you now have to pay it back over the repayment period — say, 15 years. Your lender calculates a new monthly payment that covers both principal and interest over that timeframe. That payment is usually much higher than what you paid during the draw period.

If your HELOC has a variable rate and rates have risen since you opened it, your payment is even higher. If rates have fallen, your payment may be lower than it would have been, but you are still paying principal now, which you were not before.

Some borrowers are surprised by the payment jump and struggle to afford it. Before you open a HELOC, calculate what your payment would be if you borrowed your full credit limit and rates rose by 2 or 3 percentage points. Make sure you could afford that payment when the repayment period begins.

Risks of using a HELOC

Because your home is collateral, the biggest risk is foreclosure. If you miss payments, the lender can take your house. This is different from a credit card, where the worst outcome is a damaged credit score. With a HELOC, you are betting your home.

Variable rates create payment uncertainty. If you budget based on today's rate and rates jump, your payment could become unaffordable. Some borrowers have seen their payments double or triple during periods of rising rates.

The draw period can create a false sense of security. Because payments are low and you can borrow repeatedly, it is easy to accumulate a large balance without a clear plan to repay it. When the repayment period arrives, you may owe far more than you expected to pay back.

If your home value drops, you may owe more than your home is worth, or the lender may freeze your credit line and demand repayment. This happened to many homeowners during the 2008 housing crisis.

Frequently Asked Questions

Can I use a HELOC for anything, or only for home improvements?

You can use HELOC money for almost anything — home repairs, debt consolidation, education, medical bills, or a car. Lenders do not typically restrict how you spend the money. However, using a HELOC to pay off credit card debt or fund a vacation means you are putting your home at risk for those expenses. Use a HELOC only for things you truly need and can afford to repay.

What is the difference between a HELOC and a home equity loan?

A home equity loan is a one-time lump sum you borrow and repay on a fixed schedule, usually with a fixed interest rate. A HELOC is a revolving line of credit you can draw from repeatedly during the draw period. Home equity loans have more predictable payments but less flexibility. HELOCs offer flexibility but variable rates and payment uncertainty.

Can I have a HELOC if I still owe money on my mortgage?

Yes. The HELOC becomes a second mortgage, behind your primary mortgage. If you default, the first mortgage lender gets paid first from the sale of your home, and the HELOC lender gets what is left. This is why HELOC rates are higher than primary mortgage rates — the lender takes on more risk.

What happens to my HELOC if I sell my house?

You must pay off the HELOC balance in full at closing, just like your primary mortgage. The sale proceeds go to pay both loans. If you owe $50,000 on the HELOC and your home sells for less than you owe on both mortgages combined, you may owe money out of pocket after the sale.

Can I get a HELOC if I have bad credit?

It is harder but sometimes possible. Lenders will offer a smaller credit limit, a higher interest rate, or both. Some credit unions and community banks are more flexible than large national lenders. If you are denied, work on raising your credit score and building more equity in your home, then apply again in six months to a year.