What Is a HELOC? How a Home Equity Line of Credit Works
How a HELOC works
A HELOC has two phases:
| Phase | What happens | Payments |
|---|---|---|
| Draw period (often 3 to 10 years) | Borrow, repay and borrow again up to your limit, by transfer, check or card depending on the lender | Often interest-only on what you've drawn; some lines require principal too |
| Repayment period (often 10 to 20 years) | No new draws; the balance is paid off | Principal + interest, so the payment is usually higher |
Most HELOCs have a variable rate made of an index, often the prime rate, plus a margin set by the lender. Some lenders offer a fixed-rate HELOC or let you lock a fixed rate on part of your balance. The Consumer Financial Protection Bureau's HELOC guide explains these features in detail.
How much can you borrow with a HELOC?
Lenders limit your HELOC with a maximum combined loan-to-value (CLTV): all loans on your home, including the new line, as a share of its value.
Hypothetical example for illustration only. The 85% CLTV is an example setting, not a program limit.
| Home value | $450,000 |
| Current mortgage balance | $250,000 |
| Maximum total loans at an 85% CLTV example | $382,500 |
| Estimated HELOC limit | $132,500 |
Run your own numbers in our home equity calculator.
What does a HELOC cost per month?
Hypothetical 9.00% rate, for illustration only. Not a quote or offer.
| Balance drawn | Interest-only (draw period) | Principal + interest (20-year repayment) |
|---|---|---|
| $25,000 | About $188/mo | About $225/mo |
| $50,000 | About $375/mo | About $450/mo |
| $100,000 | About $750/mo | About $900/mo |
Use the HELOC payment calculator to test your own balance, rate and terms.
What can you use a HELOC for?
- Debt consolidation: paying off higher-interest credit cards or personal loans. See our guide to a home equity loan for debt consolidation.
- Home improvements: projects paid in stages are a natural fit for a line of credit.
- Education costs spread across semesters.
- Emergency reserve: an open line you may never draw on.
- Major purchases or medical bills.
Because your home secures the line, missed payments put your home at risk. Borrow only what you can comfortably repay, and have a plan for paying the balance down before the draw period ends.
HELOC requirements
| Requirement | What lenders look for |
|---|---|
| Equity | Enough to stay under the lender's maximum CLTV after the new line |
| Credit score | Lender minimums vary; some programs work with scores in the 600s |
| Debt-to-income | Monthly debts, including the new payment, compared with income. The CFPB explains how DTI works. |
| Income | Verifiable income from pay, self-employment, retirement or other sources |
| Home value | An appraisal or, with some programs, an automated valuation |
See the full checklist in HELOC requirements. Some lenders skip the in-person appraisal for smaller lines; see HELOC without appraisal.
Pros and cons of a HELOC
| Pros | Cons |
|---|---|
| Borrow only what you need, when you need it | Variable rates can rise |
| Interest only on the amount drawn | Payment increases when repayment begins |
| Keeps your low-rate first mortgage | Your home is collateral |
| Often lower closing costs than a refinance | Possible annual, inactivity or early-closure fees |
| Reusable during the draw period | Easy access can encourage overspending |
HELOC vs other ways to tap home equity
| HELOC | Home equity loan | Cash-out refinance | |
|---|---|---|---|
| Money | Line of credit, draw as needed | Lump sum | Lump sum |
| Rate | Usually variable | Usually fixed | Fixed or adjustable |
| First mortgage | Kept | Kept | Replaced |
| Closing costs | Usually lower | Moderate | Highest |
Compare in detail: HELOC vs home equity loan and cash-out refinance vs HELOC. Veterans can also compare a VA cash-out refinance.
HELOC terms explained
| Term | Meaning |
|---|---|
| Credit limit | The most you can have borrowed at one time |
| Draw period | The years when you can borrow from the line |
| Repayment period | The years when you pay off the balance and can't draw more |
| Index | A benchmark rate, often the prime rate, that your variable rate follows |
| Margin | The amount the lender adds to the index to set your rate |
| Rate cap | A limit on how high your rate can go |
| CLTV | Combined loan-to-value: all loans on the home divided by its value |
| Balloon payment | A large lump-sum payment due at the end on some lines |
| Fixed-rate lock | An option to convert part of a variable balance to a fixed rate |
A HELOC from start to finish: an example
Hypothetical example for illustration only.
- Maria's home is worth $450,000 and she owes $250,000. She's approved for a $100,000 HELOC with a 10-year draw period and 20-year repayment period.
- In year one she draws $40,000 for a kitchen remodel and pays interest only on the $40,000.
- In year two she draws $10,000 for a roof repair, then pays $15,000 back from a work bonus. Her balance is now $35,000, and $65,000 is still available.
- She locks a fixed rate on the $35,000 so that payment stays steady.
- At the end of year ten the draw period closes. Any remaining balance is repaid with principal and interest over the next 20 years.
This flexibility, borrowing in stages and paying interest only on what's used, is the main advantage of a HELOC over a lump-sum loan.
Who a HELOC is best for
- Homeowners with solid equity and a low-rate first mortgage they want to keep
- People with costs spread over time, such as renovations or tuition
- Borrowers who want a safety net without paying interest until they use it
- Those with stable income who can handle a payment increase later
A HELOC may not be the best fit if you need one fixed amount and want a predictable payment from day one (consider a home equity loan), or if a variable payment would strain your budget.
Common HELOC mistakes
- Paying only interest for years and being surprised by the repayment-period payment
- Treating the line like spending money instead of a tool with a plan
- Not checking for annual, inactivity or early-closure fees
- Ignoring rate caps and how high a variable payment could go
- Consolidating debt and then running the cards back up
How to get a HELOC: step by step
- Estimate your equity and how much you need.
- Check your credit free at AnnualCreditReport.com.
- Compare offers: rate type, margin, caps, fees, draw and repayment periods, and any minimum draw.
- Apply with income documents, your mortgage statement and insurance details.
- Home valuation: appraisal or automated valuation.
- Close, then wait out the three-business-day right to cancel on a primary home before drawing.
Questions to ask any HELOC lender
- Is the rate variable or fixed, and what index and margin are used?
- Are there rate caps, and can I lock a fixed rate on part of the balance?
- How long are the draw and repayment periods?
- Is there a minimum draw, annual fee or early-closure fee?
- Are payments interest-only during the draw period?
- Is there a balloon payment at the end?
- How is my home's value confirmed, and how long until I can access funds?
The FTC's guide to home equity loans and lines of credit has more questions and warning signs to watch for.
HELOC closing costs and fees
HELOC costs vary widely by lender. Some charge almost nothing up front, while others have fees similar to a small mortgage. Common costs include:
- Origination fee: a flat fee or a percentage of the line
- Appraisal or valuation fee: sometimes waived with an automated valuation
- Title search and recording fees
- Annual fee to keep the line open
- Inactivity fee if you don't draw for a period
- Early-closure fee if you close the line within the first few years
Ask each lender for a full fee list so you can compare the true cost, not just the rate. A line with no closing costs but a higher margin can cost more over time than one with modest fees and a lower rate, especially if you plan to carry a balance for several years. Federal rules require lenders to give you HELOC disclosures that spell out these terms before you open the line.
HELOC taxes
HELOC interest is generally deductible only if you itemize and use the funds to buy, build or substantially improve the home securing the line. See IRS Publication 936 and consult a tax professional.
Frequently asked questions
What is a HELOC in simple terms?
A HELOC is a credit line backed by your home. You can borrow up to a set limit, repay and borrow again during the draw period, and you only pay interest on what you use.
How does a HELOC work?
You're approved for a limit based on your equity. During the draw period you borrow as needed, often making interest-only payments. Then the repayment period begins and you pay principal and interest until the balance is paid off.
Is a HELOC a good idea?
It can be if you have solid equity, a stable income and a clear plan for the money, especially if you want to keep a low-rate first mortgage. It's risky if you'd struggle with a higher payment or might overspend.
How long does it take to get a HELOC?
Often two to six weeks with a full appraisal. Some programs that use automated valuations can fund in a matter of days after approval.
What credit score do I need for a HELOC?
Each lender sets its own minimum. Some programs work with scores in the 600s, while the best terms go to higher scores.
Does a HELOC hurt your credit?
Applying causes a hard inquiry and the new line adds to your debt, which can dip your score briefly. On-time payments can help over time.
Can I pay off a HELOC early?
Usually yes. Some lenders charge an early-closure fee if you close the line within the first few years.
What happens when the HELOC draw period ends?
You can no longer borrow, and payments switch to principal and interest over the repayment period. Some borrowers refinance or pay down the balance before this point.
Is a HELOC a second mortgage?
Usually yes. Most HELOCs are recorded behind your first mortgage, so they're considered a second lien. On a home with no mortgage, a HELOC can be in first position.
Can I get a HELOC with bad credit?
It's harder but sometimes possible. Some programs work with credit scores in the 600s, usually with lower limits and higher rates. Strong equity and a manageable debt-to-income ratio help.
Can I get a HELOC on a paid-off house?
Yes. With no mortgage, all your equity counts toward the lender's CLTV limit, and the HELOC would be the only lien.
Related guides and tools
Sources
- Consumer Financial Protection Bureau: What you should know about home equity lines of credit
- Federal Trade Commission: Home Equity Loans and Home Equity Lines of Credit
- Consumer Financial Protection Bureau: What is a debt-to-income ratio?
- Internal Revenue Service: Publication 936, Home Mortgage Interest Deduction