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

A HELOC (home equity line of credit) works like a credit card, but instead of borrowing against your creditworthiness, you borrow against the value of your home. Your lender calculates how much equity you have — the difference between what your home is worth and what you still owe on your mortgage — and lets you borrow up to a percentage of that amount, usually 80 to 90 percent. You can draw money when you need it, pay it back, and draw again, all during an initial period that typically lasts 5 to 10 years.

The structure has two phases. During the draw period, you can borrow and repay as often as you want. During the repayment period, which begins when the draw period ends, you can no longer borrow new money — you can only pay down what you owe. The repayment period usually lasts 10 to 20 years. Interest rates on HELOCs are typically variable, meaning they move up and down with the market, unlike a fixed-rate mortgage or home equity loan.

Key Takeaways

  • A HELOC lets you borrow against your home's equity during a draw period, usually 5 to 10 years, and you can withdraw and repay money multiple times.
  • Your lender sets a credit limit based on your home's value, how much you owe on your mortgage, your credit score, and your income.
  • Interest rates on HELOCs are variable and can change monthly or quarterly, so your monthly payment will rise or fall with the market rate.
  • When the draw period ends, you enter a repayment period where you can no longer borrow new money and must pay off your balance, usually over 10 to 20 years.
  • Because a HELOC is secured by your home, the lender can foreclose if you stop making payments.

How lenders calculate your credit limit

Your lender starts by ordering an appraisal or automated valuation of your home to determine its current market value. They then subtract what you still owe on your mortgage and any other liens against the property. The remaining amount is your equity. Most lenders will let you borrow 80 to 90 percent of that equity, though some go as high as 95 percent.

The lender also reviews your credit score, payment history, and debt-to-income ratio — how much you owe each month compared to how much you earn. A higher credit score and lower debt load usually mean a higher credit limit and a lower interest rate. Some lenders require a minimum credit score, often around 620, though most prefer 700 or higher. If you have missed payments, collections accounts, or a recent bankruptcy, your limit will be lower or you may not be offered a HELOC at all.

The entire process typically takes 2 to 4 weeks from process to funding, though it can be faster or slower depending on how quickly you provide documents and how busy the lender is.

Interest rates and how they change

Most HELOCs carry a variable interest rate tied to a benchmark rate, usually the prime rate published by the Federal Reserve. Your rate is the prime rate plus a margin set by your lender — typically 1 to 3 percentage points. When the prime rate moves, your rate moves with it, usually within 30 to 45 days.

Some lenders offer a fixed-rate option for part or all of your HELOC balance, but this is less common and usually comes with a higher rate than the variable option. A few lenders offer a rate cap, which sets a ceiling on how high your rate can go, but caps are rare and come with trade-offs in pricing.

Because rates can change, your monthly payment can change too. During the draw period, you may only have to pay interest, so your payment might be $200 one month and $250 the next if rates rise. Once you enter the repayment period, you will owe both principal and interest, and your payment will be higher and more stable because it is spread over a fixed number of years.

Drawing money and making payments during the draw period

Once your HELOC is open, you can access the money in several ways: writing a check, using a debit card linked to the account, making an electronic transfer, or visiting a branch. There is no penalty for drawing money — you only pay interest on what you actually borrow, not on your full credit limit. If you have a $50,000 limit but only borrow $10,000, you pay interest only on the $10,000.

During the draw period, you are required to make a minimum payment each month, but the amount varies by lender. Some require you to pay at least the interest that accrued that month. Others require a percentage of your balance — often 1 to 2 percent. A few require interest plus a small amount of principal. You can always pay more than the minimum, and paying down your balance frees up credit you can borrow again.

Many people use a HELOC for home repairs, medical bills, or debt consolidation during the draw period because they can access money quickly and only pay interest on what they use. Others draw a lump sum upfront and treat it like a loan, paying it back steadily over the draw period.

What happens when the draw period ends

When your draw period expires — say, after 10 years — your HELOC moves into the repayment phase. You can no longer draw new money. Your lender will send you a notice 30 to 60 days before the transition, telling you your new payment amount and repayment schedule.

During repayment, you must pay both principal and interest each month. Your payment is calculated so that your balance reaches zero by the end of the repayment period, usually 10 to 20 years. If you owe $30,000 when repayment begins and you have 15 years to pay it back, your monthly payment will be much higher than it was during the draw period because you are now paying down principal, not just interest.

Some borrowers are surprised by the payment jump and cannot afford it. If this happens to you, contact your lender when ready — some will extend the repayment period or convert your HELOC to a fixed-rate home equity loan, though this usually means a higher interest rate and new closing costs.

Risks and protections

Because a HELOC is secured by your home, your lender can foreclose if you stop making payments. This is a serious risk that distinguishes a HELOC from an unsecured credit card or personal loan. Missing even a few payments can trigger foreclosure proceedings, and you could lose your home.

A second risk is rate volatility. If interest rates rise sharply, your monthly payment during the draw period can jump significantly. Some borrowers budget for a 5 percent rate but face 8 or 9 percent rates a few years later. To protect yourself, calculate what your payment would be at a higher rate — say, 2 to 3 percentage points above your starting rate — and make sure you can afford it.

A third risk is the temptation to borrow more than you need. Because the money is straightforward to access, some borrowers treat a HELOC like information programs and accumulate debt they cannot repay. This can leave you with a large balance when the draw period ends and the repayment period begins, forcing a painful payment increase.

Federal law requires lenders to send you clear disclosures before you sign, including the terms of the draw and repayment periods, the variable rate structure, and examples of how your payment might change. Read these disclosures carefully and ask your lender to explain anything you do not understand.

HELOC versus home equity loan

A home equity loan is different from a HELOC in structure and use. 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 interest rate. Your payment is the same every month. With a HELOC, you borrow as you need it, your rate is variable, and your payment can change.

A home equity loan is better if you know exactly how much money you need and want a predictable payment. A HELOC is better if you need access to money over time or want to pay interest only on what you actually borrow. Some borrowers use both: a home equity loan for a large, one-time expense like a roof replacement, and a HELOC for ongoing needs like medical bills or home improvements.

Frequently Asked Questions

Can I use a HELOC to pay off credit card debt?

Yes. Many borrowers use a HELOC to consolidate high-interest credit card debt because HELOC rates are usually lower. However, this only works if you stop using the credit cards and pay down the HELOC balance during the draw period. If you pay off the cards and then run them back up, you end up with both the HELOC debt and new credit card debt.

What happens if my home's value drops?

If your home loses value, your equity shrinks and your lender may reduce your credit limit or freeze your account. Some lenders did this during the 2008 housing crisis, leaving borrowers unable to access money they thought they had. You cannot force your lender to restore the limit, but you can shop around for a new HELOC with a different lender if your situation improves.

Can I get a HELOC if I have bad credit?

It is harder but not impossible. Most lenders require a credit score of at least 620, and many prefer 700 or higher. If your score is lower, you may find lenders willing to work with you, but your rate will be higher and your credit limit lower. Having significant equity in your home helps because it reduces the lender's risk.

What are the closing costs for a HELOC?

Closing costs typically range from $0 to $1,000 or more, depending on your lender and location. Some lenders charge an process fee, appraisal fee, title search, and attorney fees. Others waive some or all fees to compete for your business. Ask your lender for a written estimate of all costs before you commit.

Can I pay off my HELOC early?

Yes, and there is usually no penalty for doing so. You can pay off your entire balance at any time during the draw period or repayment period. Paying early saves you interest and frees up your home equity. Some lenders charge a prepayment penalty, but this is uncommon — ask before you sign.