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

A HELOC (Home Equity Line of Credit) works like a credit card attached to your house. Your lender looks at what your home is worth, subtracts what you still owe on your mortgage, and that difference is your equity. The lender then lets you borrow up to a percentage of that equity — often 80 to 90 percent — and you can draw from it whenever you need to, up to your credit limit.

You do not have to borrow all the money at once. During the draw period (usually 5 to 10 years), you can write checks, use a debit card, or request transfers to your bank account. You only pay interest on what you have actually borrowed, not on the full credit line. After the draw period ends, the repayment period begins (typically 10 to 20 years), and you can no longer draw new money — you just pay back what you owe.

Key Takeaways

  • A HELOC is a revolving credit line secured by your home's equity, meaning you can borrow, repay, and borrow again during the draw period.
  • You only pay interest on the money you actually withdraw, not on your full credit limit, which makes it cheaper than borrowing money you do not use.
  • The draw period (when you can borrow) and repayment period (when you pay back) are separate phases with different rules and payment structures.
  • Your interest rate on a HELOC is usually variable, meaning it changes with the market, so your monthly payment can go up or down over time.
  • If you cannot pay back what you borrowed, the lender can foreclose on your home because the HELOC is secured by your property.

How the draw period works and what you can do with the money

During the draw period, you have access to your credit line and can withdraw money in whatever amounts and on whatever schedule you choose. Some HELOCs let you write checks directly from the account. Others issue a debit card or let you request electronic transfers to your regular bank account. A few require you to take the full amount upfront, though this is less common.

You can use HELOC money for anything — home repairs, debt consolidation, medical bills, education, or a car. The lender does not restrict how you spend it. What matters is that you only owe interest on what you have drawn. If your credit line is $50,000 but you only borrow $15,000, you pay interest only on that $15,000. As you pay that money back, the amount becomes available to borrow again, just like a credit card.

The draw period length varies by lender but is typically 5 to 10 years. During this time, many HELOCs require you to pay only the interest on what you have borrowed — not the principal. This keeps your monthly payment low while you are still drawing money. Once the draw period ends, you move into the repayment period and must start paying back the principal as well.

Interest rates and how your monthly payment can change

Most HELOCs have a variable interest rate, which means it is tied to a market index (like the prime rate) plus a margin set by your lender. When the market index goes up, your rate goes up. When it goes down, your rate goes down. This is different from a fixed-rate mortgage or home equity loan, where your rate stays the same for the entire loan.

Because the rate changes, your monthly payment changes too. If you are in the draw period paying only interest, a rate increase means a higher payment. If you are in the repayment period paying principal and interest, a rate increase means you are paying more toward interest and less toward principal, which can extend how long it takes to pay off the loan.

Some HELOCs offer a fixed-rate option for part or all of the borrowed amount, but this usually comes with a higher starting rate or additional fees. Before you open a HELOC, ask your lender what the rate cap is — the maximum rate you could be charged — and what the current index and margin are so you can estimate what your payment might look like if rates rise.

The repayment period and what happens when the draw period ends

When the draw period ends, you enter the repayment period. You can no longer draw new money from the line of credit. Instead, you must pay back everything you borrowed, plus interest, over the repayment period (usually 10 to 20 years). Your monthly payment jumps because now you are paying both principal and interest, and the payment is calculated to pay off the full balance by the end of the term.

This transition can be a financial shock. If you borrowed $30,000 during the draw period and were paying only $75 per month in interest, your payment might jump to $300 or $400 per month once repayment begins. Some borrowers are caught off guard by this change and struggle to afford the new payment. Before you open a HELOC, calculate what your payment would be during repayment and make sure you can afford it.

If you still owe money when the repayment period ends, you cannot extend the loan — you must pay the remaining balance in full. Some lenders will let you open a new HELOC at that point, but you will have to may have access to again based on your current income, credit, and home value.

What happens if you cannot pay back the money

A HELOC is secured debt, meaning your home is collateral. If you stop making payments, the lender can foreclose on your house and sell it to recover what you owe. This is a much more serious consequence than defaulting on a credit card or personal loan, where the lender can sue you but cannot take your home.

If you fall behind on payments, the lender will typically contact you to work out a solution — sometimes they will let you skip a payment or restructure the loan. But if you cannot catch up, foreclosure is a real risk. Before you borrow against your home, make sure you have a realistic plan to repay the money, even if your income drops or your interest rate rises.

HELOC vs. home equity loan: which is right for you

A home equity loan is different from a HELOC. With a home equity loan, you borrow a lump sum upfront and pay it back over a fixed term with a fixed interest rate. Your payment stays the same every month. With a HELOC, you draw money as you need it, your rate is usually variable, and your payment can change.

A HELOC makes sense if you need money over time (like for ongoing home renovations) or if you want flexibility in when and how much you borrow. A home equity loan makes sense if you need a specific amount right now and want the certainty of a fixed payment. Some people open both — a HELOC for flexibility and a home equity loan for a large, one-time expense.

Fees and costs to watch for

Beyond interest, HELOCs can come with several fees. An origination fee or process fee covers the lender's cost to process your process and appraise your home — this is typically 1 to 3 percent of your credit limit. An annual fee (usually $50 to $100) is charged each year you have the account open, though some lenders waive this. A draw fee is charged each time you withdraw money, though many lenders do not charge this anymore.

If you close the HELOC during the draw period, some lenders charge an early closure fee. If you miss a payment, you will pay a late fee. Ask your lender for a complete list of fees before you sign, and factor them into your decision about whether a HELOC is worth it.

Frequently Asked Questions

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

Yes. Your HELOC is a second lien on your home, meaning it comes after your mortgage in priority if you default. Lenders typically let you open a HELOC as long as your total debt (mortgage plus HELOC) does not exceed 80 to 90 percent of your home's value. The more equity you have, the larger your HELOC can be.

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

Your lender may reduce your credit limit or freeze your account if your home value falls significantly. During the 2008 housing crisis, many lenders did this. You will still owe any money you have already borrowed, but you may not be able to draw more. Check your HELOC agreement to see what happens in this scenario.

Do I have to use my entire HELOC?

No. You only pay interest on what you draw. If you open a $50,000 HELOC and never use it, you pay nothing. If you draw $10,000 and pay it back, then draw $5,000 later, you only pay interest on the $5,000. This flexibility is one reason people open HELOCs — to have money available if they need it.

What is the difference between a HELOC and a cash-out refinance?

A cash-out refinance replaces your entire mortgage with a new, larger one and gives you the difference in cash upfront. A HELOC is a separate line of credit on top of your mortgage. A refinance locks in a new rate for your whole mortgage; a HELOC typically has a variable rate and does not change your mortgage terms.

Can I deduct HELOC interest on my taxes?

Only if you use the borrowed money to buy, build, or improve your home. If you use HELOC money for other purposes (like paying off credit cards or buying a car), the interest is not deductible. Consult a tax professional about your specific situation, as tax rules change and depend on your circumstances.