A HELOC lets you borrow against the equity you have built in your home, and you pay interest only on the money you actually withdraw

A HELOC (home equity line of credit) works like a credit card backed by your house. Your lender looks at what your home is worth, subtracts what you still owe on your mortgage, and lets you borrow up to a percentage of that difference — often 80 to 90 percent. You do not have to take all the money at once. Instead, you get a credit line and draw from it when you need to, paying interest only on what you use.

The lender secures the HELOC with a second mortgage on your home, meaning if you stop paying, they can foreclose. This is why HELOC interest rates are usually lower than credit cards or personal loans — your home backs the debt. The tradeoff is that your house is at risk if you cannot repay.

Most HELOCs have two phases: a draw period (usually 5 to 10 years) when you can borrow and repay as needed, and a repayment period (usually 10 to 20 years) when you can no longer draw and must pay off what you borrowed.

Key Takeaways

  • You borrow against your home's equity — the difference between what it is worth and what you owe on your mortgage.
  • You only pay interest on money you actually withdraw, not on your full credit line.
  • During the draw period, you can withdraw, repay, and withdraw again like a credit card; during the repayment period, you can only pay down the balance.
  • Your home secures the loan, so missing payments can result in foreclosure.
  • Interest rates are usually variable, meaning your monthly payment can change if rates rise.

How the draw period works

During the draw period, you have access to your credit line and can take money out whenever you need it. You might withdraw $5,000 one month and $15,000 six months later. The lender gives you a checkbook, debit card, or online access to move money into your checking account.

While you are drawing, you typically pay only the interest on the amount you have borrowed, not the principal. So if you have withdrawn $30,000 and your interest rate is 7 percent, you pay roughly $175 per month in interest. If you pay back $10,000 of that, your interest payment drops to roughly $117 per month. This flexibility is why people use HELOCs for ongoing expenses or projects — you draw what you need when you need it.

The draw period usually lasts 5 to 10 years, though some lenders offer longer or shorter terms. During this time, you are only required to pay interest, though you can pay down principal if you want to reduce what you owe before the repayment period begins.

What happens when the draw period ends

When the draw period ends, your HELOC moves into the repayment period. You can no longer withdraw new money. Instead, you must pay back everything you borrowed over the next 10 to 20 years, depending on your loan terms.

This is where many borrowers face a shock: your monthly payment jumps significantly. During the draw period, you might have paid $200 a month in interest only. During repayment, you might owe $400 or $500 a month to cover both interest and principal. If you borrowed $50,000 during the draw period and still owe most of it, that repayment obligation can strain your budget.

Some lenders allow you to convert your HELOC balance to a fixed-rate loan at the end of the draw period, which locks in your payment for the rest of the repayment term. Others require you to pay off the balance in full or refinance into a new loan. Read your loan agreement to understand what your lender requires.

Interest rates and how payments change

Most HELOCs have variable interest rates tied to a benchmark rate like the prime rate. When the benchmark rises, your rate rises, and your monthly payment goes up. When it falls, your payment falls. This is different from a fixed-rate mortgage, where your rate and payment stay the same for 30 years.

Some HELOCs offer a fixed-rate option for part or all of your balance, which protects you from rate increases on that portion. If you fix $20,000 of a $50,000 balance, the fixed part stays the same while the variable part moves with rates.

Because rates can change, your monthly payment is not may provide. If you borrow during a period of low rates and rates rise sharply, your payment can double or triple. This risk is real — borrowers who took HELOCs before 2008 saw their payments spike when rates climbed. Budget for the possibility that your payment will increase, or choose a fixed-rate option if your lender offers one.

Costs and fees to expect

Opening a HELOC involves costs similar to a mortgage: an process fee, appraisal fee (the lender needs to know your home's current value), title search, and closing costs. These typically range from $500 to $2,000 depending on your lender and location, though some lenders waive fees to attract borrowers.

Some HELOCs charge an annual fee just to keep the line open, even if you do not use it. Others charge a fee if you do not use the line for a certain period. Read the fee schedule before you commit.

Interest is the main ongoing cost. Because rates are variable, your total interest paid depends on how long you borrow and what rates do over time. A $30,000 HELOC at 7 percent costs roughly $2,100 per year in interest if you carry the full balance; at 9 percent, it costs $2,700 per year.

When people use HELOCs and what can go wrong

Homeowners often use HELOCs for home renovations, debt consolidation, education costs, or emergency medical bills. Because the rates are lower than credit cards, it can feel like a cheaper way to borrow. But this logic can backfire: if you use a HELOC to pay off credit card debt and then run up the credit cards again, you now owe both debts and your home is at risk.

The biggest danger is treating a HELOC like information programs. You are borrowing against your home's value, and if you cannot repay, the lender can foreclose and you lose the house. During the 2008 financial crisis, many homeowners who had borrowed heavily against their home equity found themselves underwater — owing more than their home was worth — when home values dropped.

Another risk is the payment shock at the end of the draw period. If you have borrowed $60,000 and only paid interest for 10 years, you suddenly owe $600 to $800 per month for the next 15 years. If your income has not grown or your circumstances have changed, that payment can be unaffordable.

HELOC vs. home equity loan: which is which

A home equity loan is different from a HELOC, though both use your home as collateral. With a home equity loan, you borrow a lump sum upfront and repay it over a fixed term (usually 5 to 15 years) at a fixed rate. Your payment is the same every month.

A HELOC is a line of credit: you draw as needed, pay interest only on what you use, and your payment changes if rates change. A home equity loan is simpler if you know exactly how much you need and want a predictable payment. A HELOC is more flexible if you need money over time or want to borrow only what you use.

Some lenders offer a combination: a fixed-rate home equity loan plus a HELOC, so you have both a lump sum and a backup line of credit.

Frequently Asked Questions

Can I use a HELOC if I still owe money on my mortgage?

Yes. The HELOC is a second mortgage, so it sits behind your first mortgage in the repayment order. You can have both as long as your combined debt does not exceed what the lender thinks your home is worth. Most lenders will let you borrow up to 80 to 90 percent of your home's value minus what you owe on your first mortgage.

What if my home's value drops?

Your lender may freeze or reduce your credit line if your home loses value. During the 2008 housing crisis, many borrowers found their HELOCs frozen even though they had made all their payments on time. If you are counting on a HELOC as backup funds, understand that access is not may provide if the market shifts.

Do I have to use the full credit line?

No. You only pay interest on what you withdraw. If your lender approves you for a $100,000 line but you only use $20,000, you pay interest only on that $20,000. You can leave the rest unused and draw it later if you need it.

What happens if I cannot pay during the repayment period?

If you miss payments during the repayment period, the lender can foreclose on your home, just as with a first mortgage. Your home is the collateral, so defaulting puts it at risk. If you are struggling with payments, contact your lender when ready to discuss options like loan modification or refinancing.

Can I refinance a HELOC into something else?

Yes. You can refinance a HELOC into a home equity loan, a new mortgage, or another HELOC with different terms. Refinancing involves new closing costs and a new appraisal, so compare the costs against the benefit before you proceed. Some borrowers refinance at the end of the draw period to lock in a fixed rate and avoid payment shock.