Typical HELOC terms follow a familiar shape: a draw period of about 10 years when you can borrow against a revolving credit line, a repayment period of another 10 to 20 years to pay the balance down, a variable interest rate tied to the prime rate plus a margin your lender sets, and a credit limit capped by your equity, with most lenders allowing total mortgage debt up to 80% to 85% of your home’s appraised value. Federal law requires the lender to spell all of this out before you sign.1Office of the Law Revision Counsel. 15 USC 1601 – Congressional Findings and Declaration of Purpose
The Two Phases: Draw and Repayment
A HELOC works in two distinct stages. The draw period is the first, and it typically lasts 10 years. During that window you can borrow, repay, and borrow again up to your credit limit, much like a credit card.2Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit Many lenders let you make interest-only payments during this stage, which keeps monthly bills low but leaves the principal untouched.
When the draw period ends, the repayment period begins and usually runs 10 to 20 years, depending on your agreement. You can no longer pull new funds, and your payments shift to cover both principal and interest. That transition often catches borrowers off guard, because if you were paying interest only, the monthly payment can jump sharply once principal is included. Lenders must disclose the length of both phases and the payment terms for each before you sign.3eCFR. 12 CFR 1026.40 – Requirements for Home Equity Plans
Watch for a Balloon Payment
Not every HELOC includes a formal repayment period. Some agreements call for a balloon payment, meaning the entire remaining balance comes due in a single lump sum when the draw period closes. This is more common in interest-only agreements. Federal disclosure rules require lenders to flag this clearly: if a balloon payment will definitely occur, the lender must tell you your minimum payments won’t cover the principal and that you’ll owe everything at once. If a balloon is only a possibility depending on how you pay, that also has to be disclosed.4Consumer Financial Protection Bureau. Section 1026.40 Requirements for Home Equity Plans
Options When the Draw Period Ends
You aren’t stuck with one path at the end of the draw period. Depending on your lender, you may be able to refinance the balance into a new HELOC with a fresh draw period, convert it to a fixed-rate home equity loan, or ride out the scheduled repayment. Paying it off early using savings or home-sale proceeds is another option, though early payoff can trigger a fee under some agreements. Check the loan documents well before your draw period ends so the switch to repayment doesn’t surprise you.
How the Interest Rate Is Set
HELOC rates are almost always variable. Your rate is the sum of a public index and a margin the lender fixes when you open the line. Most lenders use the prime rate as the index. As of early 2026, the prime rate sits at 6.75%.5St. Louis Fed. Bank Prime Loan Rate (MPRIME) With a margin of 1.5%, your rate would be 8.25% on whatever portion of the line you’ve used.
Federal law requires the index to be publicly available and outside the lender’s control, so a bank can’t manipulate the rate you pay.6GovInfo. 15 USC 1647 – Home Equity Plans Your rate typically adjusts monthly based on where the index sits on each adjustment date.
Introductory Rates
Many lenders offer a promotional rate for the first six to 18 months. These teaser rates can start well below the standard variable rate, then revert to the index-plus-margin formula when the promotion ends. The gap can be substantial, so plan your borrowing around what you’ll pay after the intro period, not during it.
Rate Caps and Fixed-Rate Conversions
Every variable-rate HELOC includes caps that limit how high your rate can climb. Periodic caps restrict the increase at each adjustment. A lifetime cap sets an absolute ceiling; some credit unions, for example, set lifetime caps at 18%. Your agreement should list both. Treat the lifetime cap as your worst-case number and check it before signing.
Some lenders also allow a fixed-rate conversion, which lets you lock a set rate on part of your outstanding balance. The locked chunk repays like a standard installment loan, while the rest of the line stays variable. Conversions sometimes carry a per-transaction fee.
How Much You Can Borrow
Your credit limit depends on your equity, measured through the combined loan-to-value ratio. CLTV adds your existing mortgage balance to the requested HELOC limit and divides by the home’s appraised value. Most lenders cap CLTV at 80% to 85%.
A quick example: your home appraises at $500,000, and you owe $300,000 on your first mortgage. At an 80% CLTV cap, the lender allows total debt of $400,000, which leaves room for a $100,000 HELOC. Push the cap to 85%, and total debt could reach $425,000, or a credit line of up to $125,000. The lender confirms the value with a professional appraisal, and the resulting limit is your ceiling for the entire draw period.
What It Takes to Qualify
Equity alone won’t get you the line. Lenders also review your credit and income. Most want a credit score of at least 620 to 680. Borrowers at the low end should expect higher rates and tighter limits; scores of 680 and up open more doors, and 720-plus generally unlocks the best pricing.
Debt-to-income ratio matters, too. Lenders typically want total monthly debt payments, including the projected HELOC payment, to stay under 43% to 50% of gross monthly income. If you’re brushing the ceiling, a smaller line or paying down other debts first can improve the odds. Lenders also verify employment, review your mortgage payment history, and confirm the property is your primary residence or an eligible second home.
Fees You’ll See
Opening a HELOC involves upfront costs, though usually less than a full mortgage close. The largest single item tends to be the appraisal, roughly $300 to $450. You may also see a title search fee, a credit report fee, and local recording fees. Some lenders waive part or all of these as a promotion, sometimes tied to a minimum period the line has to stay open.
Annual and Inactivity Fees
Many agreements carry an annual fee to keep the line active, from under $50 up to around $250. Some lenders also charge inactivity fees if you don’t draw on the line for an extended stretch. Federal rules require lenders to itemize every fee to open, use, or maintain the plan, plus a good-faith estimate of third-party fees, before you sign.3eCFR. 12 CFR 1026.40 – Requirements for Home Equity Plans
Early Closure Penalties
Closing a HELOC in the first two or three years can trigger a penalty. Some lenders charge a flat early termination fee of a few hundred dollars. Others take a percentage of the outstanding balance, commonly 2% to 5%. These fees are most common during the draw period but can apply during early repayment as well. If there’s any chance you’ll sell, refinance, or pay off early, the termination terms are worth negotiating up front.
Initial Draw Requirements
Some lenders require you to withdraw a minimum amount the day the line opens. Requirements range from $500 or $1,000 at some institutions to $10,000 or more at others. Interest accrues on that money immediately, whether you needed it yet or not. If you’re setting up a HELOC as a standby cushion, look for a lender that doesn’t require an initial draw.
When HELOC Interest Is Tax-Deductible
HELOC interest is deductible only if you use the borrowed funds to buy, build, or substantially improve the home securing the loan. Using the line for credit card consolidation, tuition, or other personal expenses means the interest isn’t deductible, no matter the amount.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Claiming the deduction requires itemizing on Schedule A.
When the interest does qualify, the total deductible mortgage debt is capped. For mortgages taken out after December 15, 2017, the combined limit is $750,000, or $375,000 if married filing separately. For older mortgages the limit is $1 million, or $500,000 if married filing separately. Significant tax legislation enacted in mid-2025 may affect these thresholds going forward, so check the current version of IRS Publication 936 before filing.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
When the Lender Can Change or End the Deal
A HELOC is not as locked in as a traditional mortgage. Federal law lets lenders freeze the line, reduce the limit, or demand full repayment under specific circumstances, and those triggers can cut off access to funds at the wrong moment.
Freezes and Limit Reductions
A lender can block new borrowing or lower your limit if the home’s value drops significantly below its original appraised value, if the lender has reason to believe your financial situation has changed in a way that threatens repayment, or if you default on any material term of the agreement.6GovInfo. 15 USC 1647 – Home Equity Plans Your loan agreement should list the specific conditions under which the lender can take these steps.
Outside those exceptions, lenders generally cannot change core terms on their own. They can’t raise your margin, shorten the draw period, or alter disclosed terms without a permitted trigger. Even swapping the index is restricted to cases where the original index is no longer available, and any replacement must produce a substantially similar rate.6GovInfo. 15 USC 1647 – Home Equity Plans
Foreclosure Risk
Because a HELOC is secured by your home, missing payments gives the lender the right to foreclose, even if your first mortgage is current. The HELOC sits as a second lien, so it has lower priority in a sale, but its foreclosure rights are real and independent. A lender can also demand immediate full repayment if you committed fraud on the application, failed to meet repayment terms, or took actions that jeopardized the lender’s security interest.6GovInfo. 15 USC 1647 – Home Equity Plans A drop in home value alone does not trigger a demand for immediate full repayment as long as you keep up with scheduled payments.