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

A HELOC (Home Equity Line of Credit) works like a credit card attached to your house. You borrow against the difference between what your home is worth and what you still owe on your mortgage. The lender sets a maximum you can borrow — your credit limit — and you draw from it as you need money, paying interest only on what you actually use.

The lender holds a second mortgage on your home as security. If you stop paying, the lender can foreclose and sell your house to recover what you owe, just as your primary mortgage lender can. This is why HELOCs typically carry lower interest rates than credit cards or personal loans: the lender's risk is lower because they have a claim on your property.

HELOCs come in two phases. During the draw period — usually 5 to 10 years — you can borrow and repay repeatedly, like using a credit card. During the repayment period — typically 10 to 20 years — you can no longer draw new money and must pay back what you owe.

Key Takeaways

  • A HELOC lets you borrow against your home's equity up to a limit the lender sets, and you pay interest only on money you actually withdraw.
  • The draw period (when you can borrow) and repayment period (when you pay back) are separate phases with different rules about accessing funds.
  • Your interest rate on a HELOC is usually variable, meaning it changes when the market rate changes, so your monthly payment can go up or down.
  • If you fail to repay a HELOC, the lender can foreclose on your home because the line of credit is secured by your property.
  • You need home equity — the difference between your home's value and your mortgage balance — to open a HELOC, and most lenders require at least 15 to 20 percent equity.

How much you can borrow depends on your home's equity and the lender's rules

Your home equity is what you own outright. If your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. Most lenders let you borrow 80 to 85 percent of your total equity, though some go higher or lower. If you have $100,000 in equity, a lender offering 80 percent would set your credit limit at $80,000.

The lender determines your credit limit by ordering a home appraisal or using an automated valuation model to estimate your home's current value. They also review your credit score, income, and existing debts. A higher credit score and lower debt-to-income ratio usually mean a higher credit limit and a lower interest rate.

You do not have to borrow the full amount. If your credit limit is $80,000, you might draw $10,000 in year one, $5,000 in year two, and leave the rest untouched. You pay interest only on the $15,000 you used, not on the full $80,000 available.

Interest rates on HELOCs are usually variable, not fixed

Most HELOCs carry a variable interest rate tied to a market index — commonly the prime rate published by the Federal Reserve. When the prime rate moves, your HELOC rate moves with it, usually within 30 to 45 days. This means your monthly payment can increase or decrease over time.

Some lenders offer a fixed-rate option for part or all of your HELOC balance, but this is less common and usually costs more. If you lock in a fixed rate on $20,000 of your $80,000 credit limit, the remaining $60,000 stays variable. Fixed rates on HELOCs are typically higher than variable rates at the time you choose them, because the lender is taking on the risk that rates will rise.

During the draw period, many HELOCs require only interest-only payments. You might pay $100 a month on a $10,000 balance at 6 percent interest, with no principal due. When the repayment period begins, your payment jumps because you now owe both principal and interest, often over 10 to 20 years. This payment shock surprises many borrowers who did not plan ahead.

The draw period and repayment period work differently

During the draw period, you can withdraw money whenever you want, up to your credit limit. You write a check, use a debit card linked to the account, or request a transfer to your bank account. You can pay back what you borrowed and draw again, like a credit card. Many borrowers use a HELOC to cover ongoing expenses or make home repairs over time.

When the draw period ends, the repayment period begins. You can no longer withdraw new money. Your account converts to a standard loan: you owe a fixed amount and must pay it back on a set schedule, usually over 10 to 20 years. Your monthly payment now includes both principal and interest. If you still have an outstanding balance when the repayment period ends, it is due in full — some lenders call this a "balloon payment," though it is straightforward the end of the loan term.

The timing of this transition matters. If you open a HELOC with a 10-year draw period and a 15-year repayment period, your payment structure changes completely in year 11. Borrowers who plan to sell their home or refinance before the repayment period begins can avoid this payment shock, but those who stay in the home need to budget for a significantly higher payment.

What happens if you cannot pay back a HELOC

A HELOC is a secured loan, meaning your home backs the debt. If you miss payments, the lender can file a notice of default and begin foreclosure proceedings. Because a HELOC is typically a second lien on your home (your primary mortgage is the first), the HELOC lender must wait for the primary mortgage lender to be paid off first if your home is sold in foreclosure. However, if your home sells for enough to cover both debts, the HELOC lender gets paid.

Foreclosure timelines vary by state. Some states require the lender to wait 120 days after you miss a payment before filing a notice of default; others have shorter or longer periods. Once foreclosure begins, you typically have several months to catch up on payments or sell the home before the lender can take it. The exact process depends on your state's laws and your lender's policies.

Missing HELOC payments also damages your credit score, making it harder and more expensive to borrow money in the future. The missed payments stay on your credit report for seven years.

Comparing a HELOC to a home equity loan and cash-out refinance

A home equity loan is different from a HELOC. With a home equity loan, you borrow a lump sum upfront and repay it on a fixed schedule with a fixed interest rate. You cannot draw more money later. A HELOC gives you flexibility to borrow as needed, but usually at a variable rate. Home equity loans are better if you know exactly how much you need and want a predictable payment; HELOCs are better if you need money over time or want the option to borrow more later.

A cash-out refinance replaces your entire mortgage with a new one for a larger amount, and you receive the difference in cash. If you owe $200,000 on a $300,000 home and refinance for $250,000, you get $50,000 in cash. You pay closing costs and a new interest rate on the full $250,000 loan. Cash-out refinances make sense if you can get a better interest rate on your new mortgage or if you need a large amount of money at once. HELOCs avoid refinancing costs and let you borrow gradually.

All three options use your home as collateral, so all three carry the risk of foreclosure if you cannot pay. The choice depends on how much you need to borrow, when you need it, and whether you want a fixed or variable rate.

Frequently Asked Questions

Can I use a HELOC for anything, or are there restrictions?

Most lenders do not restrict how you use HELOC money. You can use it for home repairs, debt consolidation, education, a car, or any other purpose. Some lenders ask what you plan to use it for during the process, but they typically do not enforce restrictions after you receive the funds. A few lenders may prohibit using HELOC money to invest in stocks or other speculative investments, so check your lender's terms.

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

If your home loses value, your lender may freeze or reduce your credit limit. During the 2008 housing crisis, many lenders froze HELOCs when home values fell, preventing borrowers from accessing money they thought they had. Your lender can also require you to pay back your balance when ready if the value drops significantly, though this is rare. Check your loan agreement for clauses about what happens if your home's value declines.

Do I have to pay closing costs to open a HELOC?

Yes, HELOCs typically have closing costs similar to a mortgage: appraisal fees, title search, attorney fees, and lender fees. These usually range from $500 to $2,000, though they vary by lender and location. Some lenders waive closing costs to attract borrowers, so it is worth comparing offers. You may be able to roll closing costs into your credit limit, but this means you pay interest on them.

What is the difference between a HELOC and a credit card?

Both let you borrow up to a limit and pay interest on what you use. The main difference is that a HELOC is secured by your home, so the interest rate is lower — typically 4 to 9 percent versus 15 to 25 percent for credit cards. However, if you default on a HELOC, the lender can foreclose on your home. With a credit card, the lender cannot take your home, only pursue other collection methods.

Can I have more than one HELOC?

Yes, you can open multiple HELOCs with different lenders as long as you have enough equity and your income supports the total credit limits. However, each HELOC is a separate lien on your home, and each lender can foreclose if you do not pay. Having multiple HELOCs increases your risk and makes your finances more complex to manage.