HELOC guide
How a HELOC Works: Draws, Variable Interest, Repayment, and the Risks
A home equity line of credit lets you borrow against your home as you need the money. Rates are often lower than unsecured debt, but payments can rise, and your home is the collateral.
What a HELOC is
A home equity line of credit (HELOC) is a revolving line of credit secured by your home. Like a credit card, it has a limit, and you borrow only what you need, when you need it. Unlike a credit card, your house is the collateral. If you can't repay, the lender can foreclose.
Equity is your home's value minus what you owe on it. Lenders typically cap how much you can borrow so that your mortgage plus the HELOC stay under a set share of the home's value. That share, called combined loan-to-value or CLTV, is often around 80% to 85%, depending on the lender.
Example: on a $450,000 home with $260,000 left on the mortgage, an 85% CLTV cap allows $382,500 in total debt, so the most you could likely open a line for is about $122,500. Approval and the actual limit depend on your income, credit, and an appraisal.
Two phases: the draw period and the repayment period
Draw period. Often about 10 years. You can borrow, repay, and borrow again up to your limit. Many HELOCs only require interest payments during this time.
Repayment period. Often 10 to 20 years. You can no longer draw, and payments switch to principal plus interest. Some HELOCs instead require the full remaining balance at the end of the draw period (a balloon payment). Check which one yours uses.
The switch from interest-only to full repayment can raise the payment a lot, sometimes called "payment shock."
How the interest works
Most HELOC rates are variable. They're usually set as an index, very often the prime rate, plus a margin based on your credit and CLTV. When the index moves, your rate and payment move with it, sometimes monthly. Read the line's rate caps (if any), its floor, and how often it adjusts.
A worked example
Say you draw $50,000 at an illustrative 8.5% variable rate.
| Scenario on a $50,000 balance | At 8.5% | If the rate rises to 10.5% |
|---|---|---|
| Interest-only payment (draw period) | ~$354/mo | ~$438/mo |
| Principal + interest over 20 years (repayment) | ~$434/mo | ~$499/mo |
Interest-only payments don't shrink the balance. If you pay only interest for 10 years, you'll still owe the full $50,000 when repayment starts. These rates are round numbers for illustration, not current offers.
Costs beyond interest
- Appraisal, application, or closing costs. Some lenders cover these but may charge them back if you close the line early.
- Annual or inactivity fees on some lines.
- Minimum draw requirements at opening, on some lines.
For a HELOC on your primary home, federal law generally gives you three business days after closing to cancel (the right of rescission).
HELOC vs. cash-out refinance
A cash-out refinance replaces your whole mortgage with a bigger one and gives you the difference in cash. It's usually fixed-rate and has full mortgage closing costs. If your current mortgage rate is low, replacing it can cost more than borrowing a smaller amount on a HELOC, even at a higher rate. If your current rate is high, a cash-out refinance might lower the cost of all of it. Our HELOC vs. cash-out calculator compares the two side by side with your numbers.
Risks to take seriously
- Your home is the collateral. Turning unsecured debt like credit cards into debt secured by your home raises the stakes if your income drops.
- Variable rates. Payments can rise when rates rise.
- The line can shrink. If your home's value falls a lot or your finances change, the lender may freeze or reduce your line.
- Easy to keep borrowing. A revolving line makes it easy to reborrow. Using one to pay off cards only works if the cards don't fill back up.
- Selling the home. The HELOC has to be paid off when you sell, out of your proceeds.
A note on taxes
HELOC interest is deductible only in limited cases, generally when the money is used to buy, build, or substantially improve the home that secures the loan, and only if you itemize. Ask a tax professional about your situation.
Questions to ask a lender
- What index and margin set the rate, and how often can it change? Is there a cap?
- How long are the draw and repayment periods? Is there a balloon payment?
- What are all the fees to open, keep, and close the line?
- Is there a minimum draw, and can I lock a fixed rate on part of the balance?
The CFPB explains how HELOCs work and has broader mortgage resources.
Run your own numbers
The free HELOC vs. cash-out calculator uses the inputs you choose and standard formulas. No sign-up, no credit check.
Open the HELOC vs. cash-out calculator