A HELOC is a loan against the value you own in your home

A home equity line of credit (HELOC) is a way to borrow money using your house as collateral. The lender looks at what your home is worth, subtracts what you still owe on your mortgage, and lets you borrow against that difference. You don't have to take all the money at once — you draw it as you need it, like a credit card.

The lender holds a second mortgage on your house, meaning if you stop paying, they can foreclose. This is why HELOCs typically have lower interest rates than credit cards or personal loans: the lender's risk is lower because they have a claim on your property.

HELOCs are different from home equity loans. A home equity loan gives you a lump sum upfront and you pay it back on a fixed schedule. A HELOC gives you a credit line you can tap into over time, and you pay interest only on what you actually borrow.

Key Takeaways

  • A HELOC lets you borrow against the equity in your home — the difference between what it's worth and what you owe on your mortgage.
  • You draw money as you need it during a draw period (usually 5 to 10 years), then enter a repayment period where you pay back what you borrowed plus interest.
  • Interest rates on HELOCs are typically variable, meaning they change with market rates, so your monthly payment can go up or down.
  • Your home is collateral, so the lender can foreclose if you fall behind on payments.
  • You need enough equity in your home to borrow — most lenders require at least 15 to 20 percent equity remaining after the HELOC is opened.

How much you can borrow depends on your home's value and what you owe

Lenders calculate your available equity by taking your home's current market value, subtracting your mortgage balance, and then subtracting what they require you to keep in equity. 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.

The lender will order an appraisal or automated valuation to confirm your home's worth. This costs $300 to $600 and you typically pay it upfront. If the appraisal comes in lower than you expected, your available credit line shrinks.

Your credit score and payment history also matter. Lenders usually want a score of 620 or higher, though better rates go to borrowers with scores above 740. They'll also look at your debt-to-income ratio — how much you already owe compared to what you earn — and may deny you if you're already carrying too much debt.

The draw period and repayment period work differently

Most HELOCs have two phases. During the draw period (typically 5 to 10 years), you can borrow and repay as often as you want, like a credit card. You pay interest only on what you've borrowed. Some lenders let you make interest-only payments during this time, which keeps your monthly cost low.

When the draw period ends, you enter the repayment period (usually 10 to 20 years). You can no longer borrow new money. You must pay back everything you borrowed plus interest, usually in fixed monthly payments. This is when your payment jumps, sometimes significantly, because you're now paying principal and interest instead of interest alone.

Some HELOCs convert to fixed-rate loans at the end of the draw period. Others stay variable. Read the terms carefully — if rates are high when your draw period ends, your payment could become unaffordable.

Interest rates on HELOCs are usually variable

Most HELOCs have variable interest rates tied to a market index, usually the prime rate. When the Federal Reserve raises rates, your HELOC rate rises too, and so does your monthly payment. When rates fall, your payment falls. This is different from a fixed-rate mortgage, where your rate never changes.

Some lenders offer the option to lock in a fixed rate on part or all of your HELOC balance, but this usually costs more upfront or comes with a higher rate than the variable option. Check whether your lender allows this before you open the account.

The rate you're offered depends on your credit score, the amount you're borrowing, and current market conditions. Rates vary by lender and change frequently. As of early 2024, HELOC rates range from roughly 7 to 10 percent, but this changes with the broader economy.

Costs and fees to expect

Beyond interest, HELOCs come with several fees. The appraisal fee ($300 to $600) is usually required. Origination fees (1 to 2 percent of your credit line) are common. Some lenders charge annual maintenance fees ($50 to $100) just to keep the account open, and others charge per transaction if you write checks or make transfers.

If you close the account during the draw period, some lenders charge an early closure fee. If you don't use the credit line, some charge an inactivity fee. Read the disclosure documents carefully — lenders are required to list all fees, but they're easy to miss.

You may also need to pay for a title search and title insurance, which protect the lender's interest in your home. These typically cost $200 to $400 combined.

What happens if you can't pay back what you borrowed

If you miss payments, the lender reports it to credit bureaus and your credit score drops. After 30 days late, most lenders charge a late fee. After 60 to 90 days, they may freeze your credit line so you can't borrow more.

If you fall far enough behind, the lender can foreclose on your home. This is the biggest risk of a HELOC: unlike credit card debt, which doesn't put your house at risk, a HELOC default can mean losing your home. Foreclosure takes months or years depending on your state's laws, but it ends with the lender selling your house to recover what you owe.

If you're struggling with payments, contact your lender immediately. Some offer forbearance (temporarily lower payments) or loan modification. The sooner you reach out, the more options you typically have.

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 home repairs, debt consolidation, medical bills, education, or anything else. Lenders don't restrict how you spend it. However, using a HELOC for high-risk purposes (like gambling or speculative investing) can leave you in debt with no asset to show for it.

What's the difference between a HELOC and a home equity loan?

A home equity loan gives you a lump sum upfront and you pay it back on a fixed schedule with a fixed rate. A HELOC gives you a credit line you draw from as needed, usually with a variable rate. Home equity loans have more predictable payments; HELOCs are more flexible but riskier if rates rise.

Do I need a perfect credit score to get a HELOC?

No, but a higher score gets you a lower rate. Most lenders require a score of 620 or higher. If your score is below 620, you may not be approved. If it's between 620 and 680, you'll pay a higher rate than someone with a score above 740.

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

Your existing credit line usually stays the same, but you can't borrow more. If you haven't drawn the full amount yet, the lender may reduce your available credit. During the 2008 housing crisis, many lenders froze HELOCs entirely when home values fell.

Can I have a HELOC and a mortgage at the same time?

Yes. The mortgage is your first lien (the lender gets paid first if you default). The HELOC is your second lien. Both are secured by your home. You make separate payments to each lender.