A home equity line of credit, or HELOC, works like a credit card backed by your house: the lender approves a revolving credit limit based on the equity you’ve built, and you borrow against it as needed during an initial window, then repay what you owe over a longer stretch that follows. Because your home is the collateral, the interest rate runs lower than unsecured debt, and because it’s a line rather than a lump-sum loan, you only pay interest on what you actually draw. Understanding how a HELOC works comes down to two things: the two phases the account moves through, and the variable rate that determines what each phase costs you.
The Two Phases: Draw Period and Repayment Period
Every HELOC has a draw period, typically around ten years, during which you can borrow up to your credit limit using checks, a dedicated card, or online transfers.1Consumer Financial Protection Bureau. What Is a Home Equity Line of Credit (HELOC)? You can borrow, repay, and borrow again in this window, just like a credit card. Most lenders require only interest payments during the draw period, which keeps monthly costs low but means the principal isn’t shrinking.
Once the draw period ends, the account flips into the repayment period and all new borrowing stops. This phase often lasts ten to twenty years, and you pay down both principal and interest on whatever balance remains.1Consumer Financial Protection Bureau. What Is a Home Equity Line of Credit (HELOC)? From opening to final payoff, most HELOCs run twenty to thirty years total. Some don’t amortize at all: they require the entire outstanding balance as a single lump sum on the day the draw period ends. Read the terms before signing so you know which structure you’re getting.
How Interest Rates and Payments Are Calculated
Nearly all HELOCs carry a variable interest rate that moves with the broader market. Lenders set your rate by taking a public benchmark index and adding a fixed margin on top. The most common benchmark is the U.S. Prime Rate, which as of early 2026 sits at 6.75%.2Federal Reserve. Selected Interest Rates (H.15) If your lender’s margin is 1.5 percentage points, your rate is 8.25%. When Prime moves, your payment moves with it.
Federal regulations require the lender to spell out exactly how the rate is calculated, which index it tracks, what the margin is, and whether there are caps limiting how much the rate can climb in a single year or over the life of the loan.3eCFR. 12 CFR 1026.40 – Requirements for Home Equity Plans Those caps matter. A lifetime ceiling of 18% on an 8% starting rate might feel irrelevant now, but over twenty years, rate swings can be dramatic. Ask what the maximum possible rate is and run the payment math at that ceiling before you commit.
Some lenders offer a fixed-rate conversion option that lets you lock a portion of your outstanding balance at a fixed rate during the draw period. This can stabilize payments on money you’ve already borrowed while keeping the rest of the line variable. The feature isn’t universal, so ask about it when shopping.
The Payment Jump When Repayment Starts
This is where most HELOC borrowers get caught off guard. During the draw period, interest-only payments on an $80,000 balance at 8.25% run about $550 a month. When the repayment period begins and that same balance starts amortizing over fifteen years, the payment jumps to roughly $780. That’s more than a 40% increase overnight, and it hits hardest for borrowers who drew heavily near the end of the draw period without paying down any principal along the way.
You can soften the shock by making principal payments during the draw period even when they aren’t required. Every dollar toward principal in those first ten years is a dollar that won’t compound against you in repayment. If your loan terms include a balloon payment, federal rules require the lender to disclose both the amount and the due date upfront, so you’ll know early whether a large lump sum is waiting for you.
What You Need to Qualify
Approval comes down to three numbers: your equity, your credit score, and your debt-to-income ratio. Lender-specific thresholds vary, but the typical benchmarks cluster in predictable ranges.
- Combined loan-to-value ratio (CLTV) of 85% or lower is the common ceiling, meaning you need at least 15% equity after accounting for your existing mortgage and the new credit line. Some lenders draw the line at 80%.
- A credit score of 680 has traditionally been the entry point for competitive rates, though some lenders have moved the floor closer to 620 for HELOCs.
- Debt-to-income ratio should generally fall below 43%. Some lenders allow up to 50%, but a lower DTI almost always earns a better rate.
The home also needs to be a primary residence or second home. Most lenders won’t open a HELOC on an investment property. Expect to verify income with recent pay stubs, two years of tax returns and W-2s, and your current mortgage statement, plus an employment history covering the past two years.
Costs to Open and Keep the Line
Setting up a HELOC isn’t free. Total closing costs generally run between 2% and 5% of the credit line, and cover a handful of distinct charges: a lender-ordered appraisal ($300 to $500), a title search ($75 to $200), county recording and notary fees (usually under $100 combined), and, at some lenders, an origination fee of 0.5% to 1% of the credit line. Many lenders waive origination to compete for business.
Watch for recurring charges too. Some lenders assess an annual maintenance fee that can reach a few hundred dollars, and an inactivity fee if you don’t draw on the line for a year or more. If you close or pay off the HELOC within the first two to five years, many lenders charge an early termination fee, typically 2% to 5% of the outstanding balance or a flat few hundred dollars. Some “no closing cost” HELOCs recapture waived costs through this fee, so the savings on the front end may just be deferred.
One more wrinkle: some lenders require an initial draw when the account opens, ranging from $500 to $10,000 depending on the lender and the size of your credit line. If you’re opening the HELOC mainly as a safety net, that forced draw means you’ll start paying interest right away.
Signing, Activation, and the Three-Day Cancellation Window
After approval, you attend a closing where you sign the loan agreement, settlement statement, and disclosure documents. The credit line doesn’t activate immediately. Federal law gives you a three-business-day right of rescission: you can cancel the agreement for any reason within that window by notifying the lender in writing.4eCFR. 12 CFR 1026.15 – Right of Rescission Saturdays count as business days for this count, but Sundays and federal holidays do not.5Consumer Financial Protection Bureau. How Long Do I Have to Rescind? When Does the Right of Rescission Start? Close on a Friday with no intervening holidays, and your rescission window runs through midnight the following Tuesday.
Deducting the Interest on Your Taxes
HELOC interest is only deductible on your federal income taxes if you use the borrowed funds to buy, build, or substantially improve the home that secures the loan.6Internal Revenue Service. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 2 A kitchen remodel or new roof qualifies. Paying off credit card debt or funding a vacation does not, even though the money comes from the same credit line.
The IRS draws a clear line between improvements and routine repairs. Replacing all the windows in your house counts as a substantial improvement; fixing one broken window does not. Adding a deck, installing a new HVAC system, or finishing a basement all qualify. Repainting a room or patching a roof leak generally will not.
There’s a dollar cap, too. Under current law, you can deduct mortgage interest on up to $750,000 in total acquisition debt ($375,000 if married filing separately), and that limit applies to all mortgage debt combined, not just the HELOC. The One Big Beautiful Bill Act made this cap permanent; an earlier version of the law would have raised it back to $1,000,000 after 2025, but that increase was eliminated. If you use part of the HELOC for improvements and part for personal expenses, only the interest attributable to the improvement portion is deductible, so keep clear records of how every dollar was spent.
Risks Tied to Your Home as Collateral
A HELOC is secured by a junior lien on your home, meaning the lender has a legal claim against the property behind your primary mortgage.7Consumer Financial Protection Bureau. What Is a Second Mortgage Loan or Junior-Lien? That arrangement creates risks beyond what you’d face with unsecured debt.
The Lender Can Freeze or Reduce Your Line
If your home’s value drops significantly, the lender can freeze or reduce your credit line without your consent. Under federal guidelines, a decline counts as “significant” when it erases at least 50% of the equity cushion that existed when the HELOC was approved.8HelpWithMyBank.gov. What Constitutes a Significant Decline in Home Value? If you had $20,000 in equity above your combined loan balances when the HELOC opened, a $10,000 drop in appraised value could trigger a freeze. During a broad housing downturn, this can lock you out of funds you were counting on.
Default and Foreclosure
Missing payments for 30 days or more starts damaging your credit. Fall far enough behind and the lender can demand the full remaining balance immediately. Foreclosure is less common on a junior lien than on a primary mortgage, but it remains a real possibility. The process varies by state, but generally, once payments are more than 120 days late and communication has broken down, the lender can begin formal foreclosure proceedings.
If your HELOC is with the same lender as your primary mortgage, the stakes can escalate. The lender could restrict modification options on the first mortgage or, in rare cases involving cross-collateralization clauses, declare a default on both loans at once. Before signing a HELOC with your existing mortgage lender, ask specifically whether the two loans are contractually linked.