A HELOC lets you borrow against the equity you've built in your home, and you draw money only when 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 value minus what you still owe on your mortgage. You don't borrow all that money upfront. Instead, you have access to it, and you draw only what you use. You pay interest only on the amount you've actually borrowed, not on the full credit line.

The process works in two phases: a draw period (usually 5 to 10 years) when you can borrow and repay repeatedly, and a repayment period (usually 10 to 20 years) when you can no longer draw new money and must pay back what you owe. During the draw period, many HELOCs let you make interest-only payments. When the repayment period starts, your payment jumps because you're now paying both principal and interest.

Key Takeaways

  • A HELOC is a line of credit backed by your home's equity, and you draw money only as you need it, paying interest only on what you borrow.
  • The draw period (when you can borrow) and repayment period (when you pay back) are separate phases with different payment rules and timelines.
  • Interest rates on HELOCs are usually variable, meaning your monthly payment can rise or fall as market rates change.
  • If you stop paying a HELOC, the lender can foreclose on your home because the loan is secured by your property.
  • Your payment during the draw period may be interest-only, but when repayment begins, you'll owe much larger monthly payments that include principal.

How the draw period works

During the draw period, you access your HELOC like a credit card. You receive a checkbook, debit card, or online access to your account. You write a check, make a transfer, or use the card to withdraw money whenever you need it. The lender doesn't care when or how often you draw — you control the timing and amount, up to your credit limit.

Most lenders require a minimum draw at opening (often $500 to $1,000), but after that, you draw what you want. If you borrow $5,000 in month one and repay $2,000 in month two, that $2,000 becomes available to borrow again. This is why it's called a "line" — the money cycles.

During the draw period, your monthly payment is usually interest-only. If you've borrowed $10,000 at 7 percent annual interest, your monthly payment is roughly $58. You're not reducing what you owe; you're just paying the cost of borrowing. Some HELOCs let you pay less than the interest due, but unpaid interest gets added to your balance, making your debt grow.

What happens when the repayment period begins

When the draw period ends — say, after 10 years — the repayment period starts. You can no longer borrow new money. Your lender converts your remaining balance into an amortizing loan, meaning you now pay both principal and interest over a fixed schedule, usually 10 to 20 years.

This is where many borrowers face a payment shock. If you owed $50,000 at the end of the draw period and your new repayment term is 15 years at 7 percent, your monthly payment jumps from interest-only (roughly $292) to a full amortizing payment (roughly $399). The exact amount depends on your remaining balance, the interest rate at that time, and the repayment term your lender sets.

Some HELOCs allow you to renew the line when the draw period ends, but the lender isn't required to renew, and your rate and terms may change. If renewal is denied, you must repay the full balance on whatever schedule the lender offers.

Interest rates and how they change

Most HELOCs have variable interest rates, meaning the rate moves up and down with market conditions. Your rate is usually tied to a benchmark — commonly the prime rate published by the Federal Reserve — plus a margin the lender adds. If the prime rate is 8 percent and your margin is 1 percent, your rate is 9 percent. When the prime rate drops to 7 percent, your rate drops to 8 percent automatically.

Your payment changes when your rate changes. If rates rise, your monthly payment rises even if you haven't borrowed any additional money. If rates fall, your payment falls. This unpredictability is a real risk: a HELOC that costs $200 a month today might cost $300 a month in two years if rates climb.

Some lenders offer fixed-rate HELOCs or let you lock in a fixed rate on part of your balance, but these are less common and usually come with higher rates or fees. Most standard HELOCs are variable for the entire draw period.

What you need to may have access to

Lenders look at three main things: your home's value, how much you still owe on your mortgage, and your credit and income. You need enough equity — typically at least 15 to 20 percent of your home's current value. If your home is worth $300,000 and you owe $240,000 on your mortgage, you have $60,000 in equity. Most lenders will let you borrow up to 80 or 85 percent of that equity, or about $48,000 to $51,000.

Your credit score and payment history matter because a HELOC is unsecured debt in the sense that the lender is lending you money above your mortgage. A score of 620 or higher is typical, though better rates go to borrowers with scores above 740. You'll also need to show stable income and a debt-to-income ratio the lender finds acceptable — usually 43 percent or lower.

The lender orders an appraisal to confirm your home's value. You'll pay for this upfront, typically $300 to $500. You may also pay an application fee, origination fee, or annual maintenance fee, depending on the lender. Read the disclosure documents carefully to understand all costs.

The risk of losing your home

A HELOC is secured by your home. This means if you stop paying, the lender can foreclose and sell your house to recover what you owe. This is the biggest difference between a HELOC and an unsecured credit card. Missing payments on a credit card damages your credit and leads to collection calls. Missing payments on a HELOC can result in losing your home.

Foreclosure doesn't happen overnight. Most lenders wait 120 days of missed payments before starting the process, and the timeline varies by state. But the risk is real and permanent. Before opening a HELOC, be certain you can afford the payments, especially when the repayment period begins and payments jump.

Common reasons people use HELOCs

People borrow against home equity for many reasons: home repairs or renovations, paying off high-interest credit card debt, funding education, or covering unexpected medical bills. Because the interest rate on a HELOC is usually lower than credit card rates, consolidating credit card debt into a HELOC can reduce your monthly payment and total interest paid — but only if you don't run up the credit cards again.

Some people use a HELOC as an emergency fund, keeping the line open but unused so they have access to cash if something unexpected happens. This can make sense if you're disciplined about not borrowing casually, but it also means you're paying fees (annual maintenance, for example) for money you may never use.

Frequently Asked Questions

Can I use a HELOC if I still have a mortgage?

Yes. A HELOC is a second lien on your home, sitting behind your mortgage. Your mortgage lender has first claim if you default. You can have both a mortgage and a HELOC at the same time, and many people do. The HELOC is based on equity you've built, not on the full value of your home.

What happens if interest rates spike while I'm in the draw period?

Your monthly payment increases because your rate is variable. If you've borrowed $20,000 and rates jump from 6 percent to 9 percent, your interest-only payment rises from about $100 to $150 per month. You're still only paying interest during the draw period, but that interest costs more. This is why variable-rate HELOCs carry risk — you can't predict your future payment.

Can I pay off a HELOC early?

Yes, and most lenders don't charge a prepayment penalty. You can pay off the full balance whenever you want. Some people pay off their HELOC during the draw period to avoid the payment shock when repayment begins. Others keep borrowing and repaying throughout the draw period, using it as a flexible source of funds.

What if my home's value drops after I open a HELOC?

Your credit line doesn't automatically shrink, but the lender can reduce or freeze your line if your home's value falls significantly. This happened to many borrowers during the 2008 housing crisis. If your home is worth less than you owe on your mortgage and HELOC combined, you're underwater, and most lenders won't let you draw new money.

Do I have to use my entire credit limit?

No. You draw only what you need. If your credit limit is $50,000 but you only borrow $10,000, you pay interest only on that $10,000. The unused $40,000 is available if you need it, but you don't pay for it unless you use it. Some lenders charge an annual fee regardless of whether you draw, so read your agreement.