A home equity line of credit — commonly called a HELOC — lets you borrow against the equity you have built in your home, similar to a credit card. You get a credit limit based on your home’s value minus what you owe on your mortgage, and you can draw from it as needed during a set period.
HELOCs are popular for home renovations, debt consolidation, and large purchases because they typically carry lower interest rates than personal loans or credit cards. But they also put your home on the line if you cannot repay.
How a HELOC Works
A HELOC has two main phases:
Draw Period (Typically 5 to 10 Years)
During the draw period, you can borrow from the line of credit as often as you want, up to your limit. You only pay interest on what you have actually borrowed, not the full credit limit. Many HELOCs require interest-only payments during this phase, which keeps monthly payments low.
Repayment Period (Typically 10 to 20 Years)
After the draw period ends, you enter repayment. The line of credit closes, and you must pay back the full outstanding balance in monthly installments of principal and interest. Payments can jump significantly if you only paid interest during the draw period.
How Much Can You Borrow With a HELOC?
Most lenders let you borrow up to 80% to 85% of your home’s appraised value, minus your existing mortgage balance.
Example:
- Home value: $400,000
- Remaining mortgage: $250,000
- 80% of home value: $320,000
- Maximum HELOC: $320,000 − $250,000 = $70,000
HELOC Interest Rates
Most HELOCs have variable interest rates tied to the prime rate. When the Federal Reserve raises or lowers its benchmark rate, your HELOC rate moves with it. Some lenders offer fixed-rate conversion options for more predictability.
HELOC vs. Home Equity Loan
| HELOC | Home Equity Loan | |
|---|---|---|
| Structure | Revolving line of credit | Lump-sum loan |
| Rate type | Usually variable | Usually fixed |
| Access to funds | Draw as needed | One-time disbursement |
| Best for | Ongoing projects, flexible needs | Known, one-time expenses |
Pros of a HELOC
- Lower interest rates than credit cards or personal loans
- Borrow only what you need, when you need it
- Interest may be tax-deductible if used for home improvement (consult a tax advisor)
- Flexible repayment during draw period
Cons of a HELOC
- Your home is collateral — failure to pay can lead to foreclosure
- Variable rates add uncertainty to future payments
- Requires significant home equity to qualify
- Lenders can reduce or freeze your line if your home value drops
How to Qualify for a HELOC
Lenders typically look for:
- At least 15% to 20% equity in your home
- Credit score of 620 or higher (740+ for the best rates)
- Debt-to-income ratio below 43%
- Stable income and employment history
Bottom Line
A HELOC is a powerful tool if you have substantial home equity and a specific purpose in mind. Before opening one, have a clear plan for both how you will use the funds and how you will repay the balance when the draw period ends.