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

A HELOC (home equity line of credit) is a borrowing tool that lets you draw money against the equity you have built in your home. Unlike a traditional loan where you receive a lump sum upfront, a HELOC works like a credit card — you have access to a maximum amount, you borrow what you need when you need it, and you pay interest only on what you actually use.

The lender bases your credit limit on how much equity you have. If your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. Most lenders will let you borrow 80 to 90 percent of that equity, though some go higher or lower depending on your credit score and income.

Because the HELOC is secured by your home — meaning the lender can foreclose if you stop paying — interest rates are typically lower than credit cards or personal loans. Your home is collateral, which is why the lender takes on less risk.

Key Takeaways

  • A HELOC lets you borrow against your home's equity and pay interest only on the amount you use, not the full credit line.
  • 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.
  • Interest rates on HELOCs are variable, meaning your monthly payment can increase or decrease based on market conditions and the lender's prime rate.
  • Your home secures the debt, so defaulting on a HELOC can result in foreclosure, just as with a mortgage.
  • HELOCs typically have lower closing costs than home loans, but fees vary by lender and may include appraisal, title search, and annual maintenance charges.

How the draw and repayment periods work

A HELOC operates in two phases. During the draw period, usually 5 to 10 years, you can borrow money whenever you want up to your credit limit. You make minimum payments, which often cover only the interest you owe that month — you are not required to pay down the principal.

Once the draw period ends, the repayment period begins, typically lasting 10 to 20 years. Now you can no longer borrow. Instead, you must repay the full balance, including principal and interest. Your monthly payment jumps because you are now paying down what you borrowed, not just the interest.

This structure matters because many homeowners use a HELOC for ongoing expenses during the draw period, then face a payment shock when repayment begins. If you borrowed $50,000 during the draw period and made only interest payments, you might owe that full $50,000 when the repayment period starts, with a much higher monthly bill.

Variable interest rates and payment risk

Most HELOCs have variable interest rates, which means your rate and monthly payment can change. The rate is usually tied to the prime rate, which moves with the Federal Reserve's decisions. When the prime rate goes up, your HELOC rate goes up. When it goes down, your rate goes down.

This creates payment uncertainty. If you borrow $30,000 at 7 percent interest, your monthly interest-only payment is about $175. If rates rise to 10 percent, that same payment becomes $250. Over the life of a HELOC, rate swings can significantly change what you owe each month.

Some lenders offer fixed-rate HELOCs or the option to convert part of your balance to a fixed rate, but these typically come with higher interest rates than the variable option. Read the terms carefully — some HELOCs have rate caps (a maximum rate you will never exceed), while others do not.

Costs and fees to expect

HELOC closing costs are usually lower than a mortgage — often $500 to $2,000 — but they vary widely by lender. Common fees include an appraisal (to determine your home's current value), a title search and title insurance, a credit report fee, and an underwriting or processing fee.

Some lenders charge annual maintenance fees just to keep the HELOC open, even if you do not use it. Others charge inactivity fees if you do not draw within a certain period. A few charge early closure fees if you pay off the line before a set date. Ask the lender for a full fee schedule before you commit.

The interest you pay on a HELOC may be tax-deductible if you use the money to improve your home, though tax rules changed in 2017 and vary by situation. Consult a tax professional about your specific circumstances.

When a HELOC makes sense versus alternatives

A HELOC works well if you have ongoing, uncertain expenses — home renovations that will happen in phases, medical bills, or a business that needs flexible working capital. You borrow only what you need, when you need it, and you pay interest only on that amount.

A home equity loan (a second mortgage) is different: you receive all the money upfront, you have a fixed interest rate and fixed monthly payment, and you pay interest on the full amount whether you use it or not. A home equity loan is better if you know exactly how much you need and want payment certainty.

A cash-out refinance replaces your existing mortgage with a new, larger one and gives you the difference in cash. This works if you want to lock in a lower rate or consolidate debt, but it resets your loan term and you pay closing costs again.

Credit cards and personal loans do not require your home as collateral, so they carry higher interest rates but less risk to your housing. For small, short-term needs, they may be safer than putting your home on the line.

Risks of borrowing against your home

The biggest risk is foreclosure. If you cannot pay your HELOC, the lender can force the sale of your home to recover the debt. This is different from credit card debt, where the worst outcome is a damaged credit score and collection calls.

A second risk is the payment shock at the end of the draw period. If you have been making interest-only payments and suddenly owe principal plus interest, your budget may not absorb the increase. Some homeowners find they cannot afford the repayment phase and end up in financial trouble.

A third risk is that your home's value can fall. If you borrow $80,000 against $100,000 in equity and your home's value drops to $250,000 while you still owe $200,000 on your mortgage, you now have negative equity. You are underwater, and refinancing or selling becomes difficult.

How to compare HELOC offers

Start by getting your home appraised or checking recent comparable sales to know your equity. Then contact at least three lenders — your current mortgage holder, a local bank, and an online lender — and ask for a Loan Estimate form. This document shows the interest rate, the draw period and repayment period, all fees, and any rate caps or adjustment terms.

Compare the annual percentage rate (APR), not just the interest rate, because APR includes fees and gives you a true cost picture. Check whether the rate is variable or fixed, whether there are caps, and what the maximum rate could be. Ask about annual fees, inactivity fees, and early closure penalties.

Read the fine print about what happens when the draw period ends. Some lenders automatically convert your HELOC to a fixed-rate loan; others require you to refinance or pay off the balance. Knowing this in advance prevents surprises.

Frequently Asked Questions

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

You can use HELOC money for almost anything — debt consolidation, education, medical bills, or a vacation. However, the interest may only be tax-deductible if you use it to buy, build, or improve your home. Consult a tax professional about your situation before borrowing.

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

If your home's value falls, the lender may reduce your available credit line or freeze it entirely. You still owe what you have already borrowed, but you cannot draw more. This is called a "credit line freeze" and happens most often during housing downturns.

Can I pay off a HELOC early without a penalty?

Most HELOCs allow early payoff, but some charge an early closure fee if you pay off within a set period (often 3 to 5 years). Check your loan documents or ask the lender before signing. If early closure fees apply, factor them into your decision.

What credit score do I need to get a HELOC?

Most lenders require a credit score of 620 or higher, though better rates typically go to borrowers with scores above 700. Your income, debt-to-income ratio, and home equity also matter. Ask lenders what their minimum requirements are.

Is a HELOC the same as a home equity loan?

No. A HELOC is a line of credit you draw from as needed; a home equity loan is a lump sum you receive upfront. A HELOC usually has a variable rate and interest-only payments during the draw period; a home equity loan has a fixed rate and fixed payments from the start. Both are secured by your home.