A HELOC is a line of credit tied to your home. It lets you borrow money when you need it, pay it back, and borrow again. Many homeowners use a HELOC to pay for home repairs, college tuition, or to consolidate debt.
This guide explains how a HELOC works, how much you can borrow, and how it compares to other loan types.
What Is a HELOC?
HELOC stands for home equity line of credit. It works like a credit card but uses your home as collateral. You are approved for a credit limit, and you can borrow up to that limit during a set time period called the draw period.
Your home equity is the difference between what your home is worth and what you still owe on your mortgage. If your home is worth $400,000 and you owe $250,000, you have $150,000 in equity. Lenders typically let you borrow up to 80% to 85% of your home’s value, minus your mortgage balance.
How Does a HELOC Work?
A HELOC has two main phases.
Draw period. This usually lasts 5 to 10 years. During this time, you can borrow money up to your credit limit, repay it, and borrow again. You often only pay interest during this phase.
Repayment period. This usually lasts 10 to 20 years. You can no longer borrow money. You pay back both the principal and the interest. Monthly payments are higher during this phase.
HELOCs almost always have variable interest rates. Your rate changes with the market. This means your monthly payment can go up or down over time.
How Much Can You Borrow?
Lenders use a formula called combined loan-to-value (CLTV) to decide your credit limit. They add your mortgage balance plus the HELOC amount and compare that to your home’s value.
Most lenders cap CLTV at 80% to 85%. Here is an example:
- Home value: $400,000
- Maximum CLTV (85%): $340,000
- Mortgage balance: $250,000
- Maximum HELOC: $340,000 minus $250,000 equals $90,000
Your credit score, income, and debt level also affect how much you can borrow. Most lenders require a credit score of at least 620, though better rates go to borrowers with scores of 700 or higher.
HELOC vs. Home Equity Loan: What Is the Difference?
A home equity loan gives you one lump sum upfront. You pay it back in fixed monthly payments at a fixed interest rate. A HELOC gives you a revolving line of credit with a variable rate.
Use a home equity loan when you know exactly how much you need and want predictable payments. Use a HELOC when you are not sure how much you will need or if you want the flexibility to borrow in stages.
HELOC vs. Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger mortgage and gives you the difference in cash. It usually comes with a fixed rate and a longer repayment timeline.
A HELOC keeps your existing mortgage in place and adds a second loan. If your current mortgage has a low interest rate, a HELOC lets you tap your equity without losing that rate.
What Can You Use a HELOC For?
The IRS only allows you to deduct HELOC interest if you use the money to buy, build, or improve your home. Outside of tax rules, you can use a HELOC for almost anything.
Common uses include:
- Home renovations and repairs
- Paying college tuition
- Consolidating high-interest credit card debt
- Covering emergency expenses
- Starting a small business
Using a HELOC to pay off credit card debt can save money on interest, but it turns unsecured debt into secured debt. If you cannot repay a HELOC, the lender can foreclose on your home.
What Are the Risks of a HELOC?
The biggest risk is losing your home. Because a HELOC uses your house as collateral, missing payments can lead to foreclosure.
Variable rates are another risk. If interest rates rise sharply, your monthly payment rises too. Budget for this possibility before you open a HELOC.
Some lenders can reduce or freeze your credit line if your home value drops or your financial situation changes. This can happen without much warning.
What to Look For in a HELOC
Not all HELOCs are the same. Compare these features before you apply:
- Interest rate. Look at the margin the lender adds to the index rate. A lower margin means a lower rate.
- Draw and repayment period length. Longer draw periods give more flexibility.
- Annual fees. Some lenders charge an annual fee of $50 to $100.
- Minimum draw requirements. Some lenders require you to take out a minimum amount when you open the line.
- Early closure fees. Closing a HELOC within the first few years can trigger a penalty.
How to Apply for a HELOC
The process is similar to applying for a mortgage. Here are the steps:
- Check your credit score. Aim for at least 700 to get the best rates.
- Calculate your home equity. Know your home’s current value and your mortgage balance.
- Compare lenders. Get quotes from at least three banks or credit unions.
- Gather documents. You will need pay stubs, tax returns, mortgage statements, and proof of homeowners insurance.
- Submit an application. The lender will order an appraisal and review your finances.
- Close on the HELOC. If approved, you sign documents and the line of credit opens within a few days.
Current HELOC Interest Rates (2026)
HELOC rates in 2026 are variable and tied to the prime rate, which moves with Federal Reserve policy. As of mid-2026, most lenders offer HELOCs in the range of 8.5% to 11.5% APR for borrowers with good credit. Here is what to expect by credit score tier:
| Credit Score | Estimated HELOC Rate Range | Typical Margin Over Prime |
|---|---|---|
| 760 and above | 8.5% – 9.5% | Prime + 0.5% to 1% |
| 700 – 759 | 9.5% – 10.5% | Prime + 1% to 2% |
| 660 – 699 | 10.5% – 11.5% | Prime + 2% to 3% |
| Below 660 | Not typically approved | N/A |
Because HELOC rates are variable, your payment can change from month to month. If you prefer a fixed rate, some lenders offer rate-lock options that convert a portion of your balance to a fixed-rate loan. This flexibility can help you manage risk if you expect rates to rise.
The Federal Reserve’s rate decisions directly affect your HELOC payment. When the Fed raises rates, the prime rate typically rises the same amount within days. Learn more about how this works in our guide to the federal funds rate and your finances.
HELOC Pros and Cons
| Pros | Cons |
|---|---|
| Borrow only what you need, when you need it | Your home is collateral — foreclosure risk if you cannot repay |
| Lower rates than credit cards or personal loans | Variable rates mean payments can increase |
| Interest may be tax-deductible for home improvements | Lender can reduce or freeze your credit line |
| Keep your existing low-rate mortgage in place | Closing costs of 2% to 5% of the credit line |
| Revolving access throughout the draw period | Interest-only payments during draw period can lead to payment shock |
Is HELOC Interest Tax Deductible?
HELOC interest is only tax-deductible under specific conditions set by the IRS. As of 2026, you can deduct interest paid on a HELOC if:
- You use the money to buy, build, or substantially improve your home (the one used as collateral)
- Your combined mortgage and HELOC debt is within the deduction limit ($750,000 for most taxpayers)
- You itemize deductions on your tax return (the interest is not deductible if you take the standard deduction)
If you use a HELOC to pay off credit card debt, cover college tuition, or take a vacation, that interest is not deductible. Always consult a tax professional before assuming a deduction applies to your situation.
HELOC vs. Home Equity Loan vs. Cash-Out Refinance: Full Comparison
| Feature | HELOC | Home Equity Loan | Cash-Out Refinance |
|---|---|---|---|
| How you receive funds | Revolving credit line | Lump sum upfront | Lump sum at closing |
| Interest rate | Variable | Fixed | Fixed (new mortgage) |
| Effect on existing mortgage | Second lien, mortgage stays | Second lien, mortgage stays | Replaces your mortgage |
| Best for | Ongoing or uncertain expenses | Single large expense | Lower rate than current mortgage |
| Closing costs | 2% to 5% | 2% to 5% | 2% to 6% |
| Payment during draw period | Interest only (usually) | Principal + interest from day one | Full payment from day one |
If your current mortgage has a low rate from 2020 or 2021, a cash-out refinance would mean giving that rate up in exchange for a higher one. A HELOC or home equity loan lets you tap your equity without touching your existing mortgage. Read our full analysis in Should You Refinance Your Mortgage in 2026?
How to Get the Best HELOC Rate
The rate you get on a HELOC depends heavily on your financial profile and how many lenders you compare. Here are five steps to get the lowest rate available:
- Raise your credit score before applying. Each 20-point improvement in your score can reduce your margin by 0.25% or more. Pay down revolving balances and dispute any errors on your report before applying. See our guide on how to raise your credit score 100 points.
- Get at least three quotes. Rates, margins, and fees vary significantly between banks, credit unions, and online lenders. Do not accept the first offer.
- Ask about intro-rate promotions. Some lenders offer a low fixed rate for the first 6 to 12 months. Be sure you understand what rate you get after the promotional period ends.
- Negotiate the margin. The index rate is set by the market, but the margin is set by the lender. A lower margin directly reduces your rate for the life of the HELOC.
- Check for relationship discounts. Banks often offer 0.25% to 0.50% rate reductions if you set up automatic payments from a checking account with the same bank.
Frequently Asked Questions About HELOCs
What credit score do you need for a HELOC?
Most lenders require a minimum credit score of 620 to qualify for a HELOC, but you will need a score of 700 or higher to access the best rates. Some lenders set the floor at 680. Check your score before applying and give yourself time to improve it if needed.
How long does it take to get a HELOC?
A HELOC typically takes 2 to 6 weeks from application to funding. The timeline depends on how quickly you provide documents, how fast the lender orders an appraisal, and how backed up the underwriting team is. Some online lenders advertise 10-day approvals.
Can you pay off a HELOC early?
Yes. You can pay off a HELOC at any time during the draw or repayment period. Some lenders charge an early closure fee if you close the line within the first 2 to 3 years. Check your loan agreement before paying off and closing the account early.
What happens to a HELOC when you sell your home?
When you sell your home, any outstanding HELOC balance must be paid off at closing, just like your primary mortgage. The lender holds a lien on your property, so you cannot transfer ownership without settling the balance.
Can you get a HELOC on a rental property?
Some lenders offer HELOCs on investment properties, but rates are higher and approval standards are stricter. Many lenders only allow HELOCs on primary residences or second homes. Expect to pay 1% to 2% more in rate if you can find a lender that will approve it.
What is the difference between a HELOC draw period and repayment period?
The draw period (usually 5 to 10 years) is the phase when you can borrow against your credit line and typically make interest-only payments. The repayment period (usually 10 to 20 years) begins when the draw period ends. You can no longer borrow, and your monthly payment includes both principal and interest, which often means a significantly higher payment.
Is a HELOC the same as a second mortgage?
A HELOC is technically a form of second mortgage because it creates a second lien on your property. However, it functions differently from a traditional second mortgage (home equity loan) because a HELOC is a revolving line rather than a lump-sum loan.
How much equity do you need to get a HELOC?
Most lenders require at least 15% to 20% equity in your home after accounting for both your mortgage and the HELOC. In practice, this means your combined loan-to-value (CLTV) ratio cannot exceed 80% to 85%. If your home is worth $400,000 and you owe $320,000 on your mortgage, you do not have enough equity with most lenders.
Is a HELOC Right for You?
A HELOC works best when you have strong home equity, a solid credit score, and a specific plan for how you will use and repay the money. It is a flexible tool, but it comes with real risk.
If you want predictable payments and a fixed rate, a cash-out refinance or home equity loan may be a better fit. If you are comfortable with a variable rate and want the flexibility to borrow as you go, a HELOC can save money compared to personal loans or credit cards.
If your goal is to consolidate high-interest debt, compare HELOC rates against our roundup of the best debt consolidation loans before committing — the interest savings need to outweigh the risk of securing unsecured debt against your home.
Always compare multiple lenders and read the fine print before signing. Your home is the collateral. Treat the decision accordingly.
For more context on how interest rates affect your HELOC payment month to month, see our guide to adjustable-rate mortgages — the mechanics of how variable rates work are similar.