A home equity line of credit, or HELOC, lets you borrow against your home’s equity through a revolving credit line that works much like a credit card, with your house as collateral. Understanding how a HELOC works comes down to four moving parts: how much the lender will let you borrow, how the interest rate is set, a draw period when you can pull money out, and a repayment period when you pay it all back. Miss payments and the lender can foreclose, because the loan is secured by a second lien on your property.1Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit (HELOC)
How Much You Can Borrow
Lenders size your credit line using a combined loan-to-value ratio (CLTV). They take your home’s appraised value, apply a percentage cap, and subtract what you still owe on your first mortgage. The caps usually sit between 80% and 85%, though some lenders go as high as 95%.
A quick example. If your home appraises at $400,000 and the lender caps borrowing at 80%, your total borrowing ceiling is $320,000. Subtract a $200,000 first mortgage balance and your HELOC maxes out at $120,000. Different lenders use different caps, so shopping around can meaningfully change the number you’re offered.
To set the value, the lender orders either a traditional in-person appraisal or an automated valuation model that pulls from public records and comparable sales. Most HELOC originations now use the automated route, which is faster and cheaper. A full appraisal on a single-family home runs roughly $300 to $425.
What You’ll Pay in Interest
HELOC rates are almost always variable, built from two pieces: an index and a margin. The index is usually the prime rate, which tracks the Federal Reserve’s benchmark. The margin is a fixed percentage the lender adds based on your credit profile. If prime sits at 6.75% and your margin is 3%, your HELOC rate is 9.75%. When the Fed moves, your rate moves with it, typically adjusting once a month.
Every HELOC includes rate caps. Lenders must disclose a lifetime ceiling (often around 18%) along with limits on how much the rate can jump at the first adjustment and at each periodic adjustment after that. Federal regulations require these disclosures before you sign, so read the fine print on the initial rate, the margin, and all three cap levels.2eCFR. 12 CFR Part 1026 – Truth in Lending (Regulation Z)
The Draw Period
The first phase of a HELOC typically lasts ten years. During this window, you can borrow, repay, and borrow again up to your credit limit. Most lenders give you access through a dedicated checkbook or a card linked to the credit line.
Monthly payments during the draw period are usually interest-only, calculated on your current balance. Draw $25,000 at a 7% rate and your monthly payment is roughly $146. That low payment is appealing, but you aren’t chipping away at principal. Every dollar you borrowed is still owed when the draw period ends.
Watch for a few costs that can catch you off guard. Some lenders charge an annual or membership fee just to keep the line open, and others impose an inactivity fee if you don’t use the line for a stretch of time.3Consumer Financial Protection Bureau. What Fees Can My Lender Charge if I Take Out a HELOC Many lenders also require an initial draw at account opening, anywhere from $500 to $10,000 depending on the lender and the size of your line. Ask about these charges upfront.
The lender can also freeze or reduce your available credit mid-draw if your home value drops or your finances deteriorate.1Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit (HELOC) A HELOC isn’t a guaranteed pot of money sitting there; it’s a line the lender can shrink.
The Repayment Period
Once the draw period closes, you can’t borrow any more. The repayment period typically runs 20 years, during which you pay both principal and interest every month until the balance reaches zero. The payment jump can be dramatic. A borrower paying a few hundred dollars in interest-only payments might suddenly owe twice that or more once principal repayment kicks in.
Some HELOCs are structured with a balloon payment, meaning the entire remaining balance comes due at once at the end of the term rather than being spread across monthly installments. Federal Reserve research found that borrowers with balloon HELOCs default at significantly higher rates than those with standard amortizing payments.4Federal Reserve Board of Governors. End of the Line: Behavior of HELOC Borrowers Facing Payment Changes If your HELOC has a balloon feature, plan your exit well before the due date.
The stakes are real. Because your home secures the debt, failure to keep up with repayment can lead to foreclosure. The lender holds a second lien, which sits behind the primary mortgage in priority but still allows the lender to initiate foreclosure proceedings.5Consumer Financial Protection Bureau. What Is a Second Mortgage Loan or Junior-Lien
HELOC vs. Home Equity Loan
People often confuse the two, but they work differently. A home equity loan gives you a lump sum upfront that you repay in fixed monthly installments, usually at a fixed interest rate. A HELOC gives you a revolving credit line you can tap as needed, typically at a variable rate.6Consumer Financial Protection Bureau. What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit (HELOC)
A home equity loan makes sense when you know the exact amount you need and want predictable payments. A HELOC is better when you need flexible access over time, like funding a renovation in stages or covering expenses that come in unpredictably. The trade-off is rate risk. If you expect rates to fall, a HELOC’s variable rate adjusts in your favor without a refinance. If you expect rates to rise, a fixed home equity loan protects you from that.
What HELOC Interest You Can Deduct
Starting in 2026, the mortgage interest deduction rules reverted to where they stood before the Tax Cuts and Jobs Act. Under the current rules, you can deduct interest on up to $1 million in mortgage debt used to buy or improve your home ($500,000 if married filing separately), plus interest on up to $100,000 in home equity debt regardless of how you spend the money.7United States Congress. Selected Issues in Tax Policy: The Mortgage Interest Deduction
That “regardless of use” piece is the significant change from 2018 through 2025, when HELOC interest was only deductible if you used the funds to buy, build, or substantially improve the home securing the loan.8Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction Borrowers who use HELOC funds for debt consolidation, tuition, or other non-home purposes can now deduct interest on up to $100,000 of that balance. You still have to itemize to claim it, so the benefit mainly helps homeowners whose total itemized deductions exceed the standard deduction.
Applying and Closing
Getting approved requires proving both that your home has enough equity and that your income can support the payments. Most lenders look for a credit score in the mid-600s at minimum, with the best rates reserved for scores in the mid-700s and above. Gather these before you apply:
- Two years of W-2 forms and federal tax returns, plus recent pay stubs covering at least 30 days.
- Your most recent mortgage statement showing the outstanding balance.
- Proof of homeowner’s insurance and recent property tax records.
- Statements for savings accounts, investment accounts, and any outstanding debts like car loans or student loans.
Most lenders use a standard uniform loan application that asks for a full picture of your finances.9Fannie Mae. Uniform Residential Loan Application Be ready to explain large deposits, recent credit inquiries, or gaps in employment.
After you submit, the lender orders a property valuation, runs a title search, and begins underwriting. Expect roughly 30 to 45 days, depending on how complex your financial picture is. Closing costs can include the appraisal fee, title search fee, title insurance, recording fees, and notary charges. Some lenders cover part or all of these to win your business, but they may recover the money through an early termination fee if you close the line within the first few years. Read the terms carefully before assuming a “no closing cost” HELOC is the better deal.
At closing, you sign the loan agreement and receive a notice explaining your right to cancel. Federal law gives you until midnight on the third business day after signing to rescind without penalty. For this countdown, business days include Saturdays but not Sundays or federal holidays. Close on a Friday with no holidays in between, and your deadline to cancel is midnight the following Tuesday.10Consumer Financial Protection Bureau. How Long Do I Have to Rescind? When Does the Right of Rescission Start? Funds become accessible once that rescission window closes.11Consumer Financial Protection Bureau. 12 CFR 1026.23 Right of Rescission