A HELOC (home equity line of credit) is a loan that lets you borrow against the equity in your home, spending and repaying as you go, similar to how a credit card works. Instead of receiving a lump sum, you get a credit limit you can draw from whenever you need cash, using your home as collateral. It’s one of the most common ways homeowners tap into the value they’ve built up in their property.
How a HELOC Works
Once you’re approved for a HELOC, your lender sets a maximum credit limit based on the equity in your home. You can borrow up to that limit whenever you want, typically using special checks or a dedicated card. Some lenders require a minimum draw each time (for example, $300) or require you to take an initial amount when the credit line is first set up.
The key feature that separates a HELOC from a standard loan is flexibility. You only pay interest on the amount you’ve actually borrowed, not on the full credit limit. If your limit is $50,000 and you’ve only drawn $10,000, you’re paying interest on that $10,000. As you repay what you’ve borrowed, that credit becomes available again without needing to reapply.
The Two Phases: Draw Period and Repayment Period
Every HELOC has two distinct phases that change how you borrow and what you owe each month.
Draw Period
The draw period typically lasts up to 10 years, though some lenders set it as short as three or five years. During this time, you can freely borrow, repay, and borrow again up to your limit. Most lenders only require you to make interest payments during this phase, which keeps your monthly costs relatively low. Some plans do require a portion of principal as well, but interest-only payments are the norm.
This phase is when a HELOC feels most like a credit card. You have ongoing access to funds, and your balance can fluctuate month to month depending on how much you use.
Repayment Period
Once the draw period ends, you enter the repayment period, which often lasts 10 to 20 years. You can no longer borrow against the line. Your payments now include both principal and interest, calculated on an amortization schedule just like a regular mortgage. This means your monthly payment will jump, sometimes significantly, compared to the interest-only payments you were making before.
Some HELOC plans don’t amortize the balance at all and instead require a balloon payment, meaning you’d owe the entire remaining balance at once. This is less common, but it’s worth checking the terms before you sign up.
Interest Rates on a HELOC
Most HELOCs carry a variable interest rate, meaning your rate moves up and down with the broader market. Lenders typically calculate your rate by starting with the prime rate (a benchmark that tracks the Federal Reserve’s federal funds rate, plus three percentage points) and adding a margin based on your creditworthiness.
Because the rate is variable, your monthly payment can change even during the draw period. When rates rise, you pay more interest on your outstanding balance. When rates fall, your costs drop. This is fundamentally different from a home equity loan, which locks in a fixed rate for the life of the loan.
HELOC rates generally run higher than primary mortgage rates but lower than personal loan or credit card rates. The exact rate you receive depends heavily on your credit score, how much equity you have, and the lender’s own pricing.
Qualifying for a HELOC
To get approved, you’ll need sufficient equity in your home, a reasonable credit score, and stable income. Most lenders look for a credit score between 620 and 680 as a minimum, though the terms you receive vary considerably across that range. A score of 620 might get you approved but with a higher rate and a lower credit limit. Scores of 700 and above typically unlock the most competitive rates.
Lenders also evaluate your combined loan-to-value ratio, which measures how much total mortgage debt you carry compared to your home’s current appraised value. If you still owe $200,000 on a home worth $350,000, you have roughly $150,000 in equity, but lenders won’t let you borrow all of it. Most cap the combined loan-to-value ratio at 80% to 85%, meaning they want you to retain a cushion of equity.
Your debt-to-income ratio matters too. Lenders want to see that your total monthly debt payments, including the potential HELOC payment, don’t consume too large a share of your gross monthly income.
Costs and Fees
HELOCs can come with several fees beyond the interest you pay on borrowed funds. Common charges include appraisal fees (since the lender needs to verify your home’s current value), application or origination fees, and annual fees to keep the line open. Some lenders also charge early closure fees if you close the HELOC within the first few years.
That said, competition has pushed many lenders to waive some or all of these fees. It’s not unusual to find HELOCs advertised with no origination fee and no annual fee. Shopping around matters here, because the fee structures vary widely from one lender to the next.
How a HELOC Differs From a Home Equity Loan
Both products let you borrow against your home’s equity, but they work quite differently in practice. A home equity loan gives you a single lump sum with a fixed interest rate, and you start repaying principal and interest immediately in equal monthly payments. It works like a traditional installment loan.
A HELOC, by contrast, gives you a revolving credit line with a variable rate and lets you borrow only what you need, when you need it. During the draw period, you’re typically making smaller interest-only payments.
A home equity loan makes more sense when you know exactly how much you need upfront and want payment predictability. A HELOC is better suited for ongoing or unpredictable expenses, like a home renovation that unfolds in stages, or as a financial safety net you can tap when needed. The tradeoff is that the variable rate introduces uncertainty into your future costs.
What People Typically Use a HELOC For
Home improvements are the most common use, partly because the flexible draw structure aligns well with projects that happen in phases and have unpredictable costs. Homeowners also use HELOCs to consolidate higher-interest debt like credit cards, cover large medical bills, or fund education expenses.
Because your home secures the loan, the stakes are real. If you can’t make your payments, the lender can foreclose. Borrowing for things that don’t build long-term value, like vacations or everyday spending, puts your home at risk without a corresponding financial benefit. Interest on HELOC funds may be tax-deductible if the money is used to buy, build, or substantially improve the home that secures the loan, but not if the funds go toward other expenses.
What Happens When You Sell Your Home
If you sell your home while a HELOC is open, you’ll need to pay off the outstanding balance at closing. The proceeds from the sale cover your primary mortgage first, then any remaining HELOC balance. Whatever is left after both debts are settled is your take-home equity. If your home’s value has declined and the sale doesn’t cover both balances, you’d owe the difference out of pocket.