A home equity line of credit, or HELOC, is a revolving credit line secured by your home that lets you borrow against the equity you’ve built up. It works similarly to a credit card: you’re approved for a maximum amount, draw from it as needed, and only pay interest on what you actually use. Unlike a home equity loan, which hands you a lump sum all at once, a HELOC gives you flexible, ongoing access to funds over a set period.
How a HELOC Works
A HELOC has two distinct phases. The first is the draw period, which typically lasts up to 10 years (though some lenders set it at three or five years). During this phase, you can borrow from your credit line whenever you want, repay some or all of it, and borrow again, just like a credit card. You’re generally required to make only interest payments during the draw period, though paying down principal early will save you money over time.
The second phase is the repayment period, which can last up to 20 years. Once you enter repayment, you can no longer draw funds. Your monthly payments now include both principal and interest, calculated on an amortization schedule identical to a standard mortgage. This transition often catches borrowers off guard because the payments jump significantly once principal is included.
HELOCs usually carry variable interest rates, meaning your rate and monthly payment can fluctuate with market conditions. Many lenders offer the option to lock in a fixed rate on all or part of your balance, though they typically charge a small fee (around $50 to $75) to do so.
How Much You Can Borrow
The size of your credit line depends on how much equity you have in your home. Equity is the difference between your home’s current market value and what you still owe on your mortgage. Most lenders let you borrow up to 80% of your equity, though some go as high as 85% or 90%.
Here’s a simplified example. If your home is worth $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity. At 80%, a lender might approve a credit line of up to $120,000. However, most lenders also require you to keep at least 15% to 20% of your home’s value untouched as a cushion, which can reduce the available amount depending on your mortgage balance.
Lenders look at this through a metric called the combined loan-to-value ratio, or CLTV. That’s your existing mortgage balance plus the new HELOC divided by your home’s appraised value. A CLTV at or below 80% is the standard threshold, though some lenders stretch beyond that.
Eligibility Requirements
Beyond equity, lenders evaluate your credit score, income, and existing debt. Many lenders approve HELOCs for borrowers with credit scores in the low-to-mid 600s, with 620 being a common minimum. Some lenders will work with scores below 620 but may require you to have more equity or carry less debt relative to your income.
You’ll also need to demonstrate stable income and a manageable debt-to-income ratio, which compares your monthly debt payments to your gross monthly income. Lenders use this to gauge whether you can handle additional borrowing on top of your existing obligations. Most want to see this ratio at or below 43%, though the exact threshold varies.
Costs and Fees
HELOCs tend to have lower upfront costs than home equity loans or cash-out refinances, but they’re not free. An appraisal is usually required so the lender can confirm your home’s current value, and appraisal fees average around $358. Beyond that, several other fees can apply:
- Application or origination fee: A one-time charge ranging from $15 to $75 at many lenders, though some charge a percentage of the credit line instead.
- Annual fee: A yearly maintenance charge of $5 to $250, billed whether or not you use the credit line that year.
- Transaction fee: A small surcharge (often around $5) each time you draw from the line, similar to an ATM fee.
- Inactivity fee: A charge of $5 to $50 if you go a long stretch without using the credit line.
- Early cancellation fee: If you close the account during the draw period, lenders may charge a flat fee up to $500.
Not every lender charges all of these, and some waive certain fees to compete for business. Ask for a full fee schedule before you commit. Over the life of a HELOC, these smaller costs can add up, especially the annual fee on an account you keep open for years.
Tax Deductibility of HELOC Interest
HELOC interest is tax-deductible, but only if you use the borrowed funds to buy, build, or substantially improve the home that secures the line of credit. If you use HELOC money to renovate your kitchen or add a bathroom, the interest qualifies. If you use it to pay off credit card debt, fund a vacation, or cover tuition, the interest is not deductible. The IRS draws a firm line based on what the money is actually used for, not simply that it’s secured by your home. You’ll also need to itemize deductions rather than take the standard deduction to claim the benefit.
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 repayment schedule, and it often comes with a fixed interest rate. You know exactly what your payment will be every month from the start. A HELOC, by contrast, gives you a revolving credit line with a variable rate. You borrow only what you need, when you need it, and your payments shift based on your outstanding balance and current interest rate.
A home equity loan makes more sense when you have a one-time expense with a known cost, like consolidating debt or financing a specific project with a firm budget. A HELOC works better when your expenses are spread out over time or unpredictable in size, like ongoing home improvements or covering irregular business costs. The flexibility of a HELOC is its biggest advantage, but variable rates mean your costs can rise if market rates climb.
What People Typically Use HELOCs For
Home improvements are the most common use, partly because they can increase your property’s value and partly because the interest may be tax-deductible. But homeowners also use HELOCs as a financial safety net, keeping the line open for emergencies without paying interest unless they actually draw from it (though annual and inactivity fees may still apply).
Some borrowers use HELOCs to cover large, irregular expenses like medical bills or education costs. Others tap them to bridge short-term cash flow gaps. Because your home serves as collateral, the risk is real: if you can’t make payments, the lender can foreclose. This makes it important to borrow conservatively and have a clear plan for repayment, especially before the draw period ends and full principal-and-interest payments begin.