A HELOC is a line of credit you borrow against using your home as collateral
A HELOC (home equity line of credit) lets you borrow money repeatedly from a lender, up to a set limit, using the equity you have built in your home. The lender holds a claim on your house as security — meaning if you stop paying, the lender can foreclose. You draw money when you need it, pay interest only on what you borrow, and repay on a schedule the lender sets.
A HELOC is not the same as a home equity loan. A home equity loan gives you one lump sum upfront. A HELOC works more like a credit card: you have a credit line, you draw from it as needed, and your balance and payment change month to month.
Most HELOCs have two phases. During the draw period — usually 5 to 10 years — you can borrow and repay repeatedly. During the repayment period — usually 10 to 20 years — you can no longer borrow; you only pay down what you owe.
Key Takeaways
- A HELOC lets you borrow up to a limit based on your home's value minus what you owe on your mortgage, and you pay interest only on the amount you actually use.
- Your interest rate is usually variable, meaning it changes with market rates, so your monthly payment can go up or down over time.
- If you fail to repay, the lender can foreclose on your home, so a HELOC is riskier than unsecured debt like credit cards.
- Most HELOCs have a draw period when you can borrow freely, then a repayment period when you can only pay down your balance.
- You need home equity — the difference between what your home is worth and what you owe on your mortgage — to open a HELOC.
How much you can borrow depends on your home's value and your existing mortgage
Lenders calculate 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. Most lenders will let you borrow up to 80 or 85 percent of your home's total value, minus your mortgage balance.
Example: Your home is worth $300,000. You owe $200,000 on your mortgage. Your equity is $100,000. If a lender allows you to borrow up to 80 percent of your home's value, that is $240,000 total. Subtract your mortgage of $200,000, and your available HELOC credit is $40,000.
The exact percentage varies by lender and by your credit score and income. Lenders with stricter standards may cap you at 75 percent of home value. Others may go higher if your credit is strong. You will need to provide recent pay stubs, tax returns, and a home appraisal or automated valuation to prove both your income and your home's current worth.
Interest rates on HELOCs are usually variable, not fixed
Most HELOCs carry a variable interest rate, which means the rate changes periodically — often every month or quarter — based on a benchmark rate set by the Federal Reserve. When the benchmark rises, your rate rises. When it falls, your rate falls. Your monthly payment changes along with it.
Some lenders offer a fixed-rate option, but it usually comes with a higher starting rate or a higher fee. A fixed rate locks in your interest rate for the life of the loan, so your payment stays the same even if market rates change. Fixed-rate HELOCs are less common and more expensive, but they remove the risk of payment shock.
During the draw period, many lenders let you pay interest-only, meaning your monthly payment covers only the interest you owe that month and does not reduce your balance. Once the repayment period begins, you must pay both principal and interest, and your payment usually rises sharply because you now have a shorter time to pay off what you borrowed.
What you need to open a HELOC
Lenders require proof of income, a credit check, and a home appraisal or valuation. Bring recent pay stubs (usually the last two months), recent tax returns (usually the last two years), and bank statements showing your savings. Self-employed borrowers typically need two years of tax returns and may need additional documentation.
The lender will order an appraisal or use an automated valuation model to determine your home's current market value. This usually costs $300 to $500 and is either paid upfront or rolled into your loan costs. You will also need a clear title to your home — meaning no other liens besides your mortgage, or at least no liens that would prevent the HELOC lender from claiming second position.
Your credit score matters. Most lenders want a score of at least 620, though many prefer 700 or higher. Your debt-to-income ratio — the percentage of your monthly income that goes to debt payments — also matters. Lenders typically want this ratio below 43 percent, though some allow higher ratios for borrowers with strong credit and savings.
Costs and fees associated with opening a HELOC
HELOCs often come with an annual fee (usually $50 to $100), an appraisal fee ($300 to $500), and closing costs that can range from $500 to $2,000 depending on your state and lender. Some lenders waive the annual fee if you maintain a minimum balance or draw a certain amount each year. A few lenders waive closing costs entirely, though they may charge a higher interest rate to offset this.
Unlike a mortgage, a HELOC typically does not require title insurance or a survey. However, the lender will file a lien against your home, and you may pay a recording fee to register that lien with your county. Ask the lender for a written estimate of all costs before you commit.
If you close the HELOC before the draw period ends, some lenders charge an early closure fee, usually $300 to $500. Read the terms carefully to understand when and whether this applies.
The risk: your home is collateral
A HELOC is secured debt, meaning the lender has a legal claim on your home. If you miss payments, the lender can foreclose and force a sale of your house to recover what you owe. This makes a HELOC riskier than unsecured debt like credit cards or personal loans, where the lender cannot seize your home.
A second risk is payment shock. If you borrow heavily during the draw period and pay only interest, your balance stays high. When the repayment period begins, your payment can double or triple because you now have to pay both principal and interest on a large balance over a shorter time. If interest rates have also risen, the shock is even larger.
A third risk is that your home's value can fall. If your home loses value and you still owe more than it is worth, you have negative equity. You cannot borrow more, and if you need to sell, you may owe money out of pocket. This happened to many homeowners during the 2008 housing crisis.
HELOC vs. home equity loan vs. cash-out refinance
A home equity loan gives you one lump sum upfront, usually with a fixed interest rate and a set repayment schedule. You pay the same amount every month for the life of the loan. A home equity loan is simpler if you know exactly how much you need and when. A HELOC is more flexible if you need money over time or are unsure of the total amount.
A cash-out refinance replaces your entire mortgage with a new, larger one and gives you the difference in cash. If your current mortgage rate is lower than the new rate, a cash-out refinance can be expensive. But if rates have fallen, it may be cheaper than a HELOC. A cash-out refinance also resets your loan term, so you may end up paying for 30 years instead of 10.
| Feature | HELOC | Home Equity Loan | Cash-Out Refinance |
|---|---|---|---|
| How you get the money | Draw as needed during draw period | One lump sum upfront | One lump sum at closing |
| Interest rate | Usually variable | Usually fixed | Fixed or variable |
| Monthly payment | Changes with rate and balance | Same every month | Same every month (usually) |
| Best for | Ongoing or uncertain expenses | One large expense | Consolidating debt or refinancing |
| Closing costs | $500–$2,000 | $500–$2,000 | $2,000–$5,000 |
Frequently Asked Questions
Can I use a HELOC for anything I want?
Yes. Once the money is in your account, you can use it for any purpose: home repairs, debt consolidation, education, medical bills, or a vacation. Lenders do not restrict how you spend HELOC money. 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.
What happens to my HELOC if I sell my house?
You must pay off the entire HELOC balance from the sale proceeds before you receive any money. The lender's lien is paid off at closing, just like your mortgage. If your home sells for less than you owe on both your mortgage and HELOC combined, you may owe money out of pocket.
Can I get a HELOC if I have bad credit?
It is difficult but not impossible. Most mainstream lenders require a credit score of at least 620, and many prefer 700 or higher. Some credit unions and specialized lenders work with lower scores, but they charge higher interest rates and may require a larger down payment or co-signer. Your home equity and income matter more to these lenders than your credit score.
What if interest rates rise sharply while I have a HELOC?
Your interest rate and monthly payment will rise. If you have a variable-rate HELOC and rates increase significantly, your payment can become unaffordable. This is why some borrowers lock in a fixed rate, even at a higher starting rate, to protect against future increases. Read your HELOC agreement to see if you can convert to a fixed rate later.
Do I have to use the full HELOC credit line?
No. You can open a HELOC and borrow nothing, or borrow only part of your available credit. You pay interest only on what you actually borrow, not on the unused portion. However, you will still owe any annual fees the lender charges, whether you use the line or not.