A HELOC is a line of credit you can borrow against using your home as collateral

A HELOC (home equity line of credit) is a revolving credit account tied to the equity you have built up in your home. Unlike a traditional loan where you receive a lump sum upfront, a HELOC works like a credit card: you have access to a maximum amount of money, you borrow what you need when you need it, and you pay interest only on what you actually use. The lender holds a second mortgage on your home as security.

The amount you can borrow depends on how much equity you have accumulated—the difference between what your home is worth and what you still owe on your mortgage. If your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. Most lenders will let you borrow 80 to 90 percent of that equity, so in this example you might be offered a HELOC of $60,000 to $80,000.

HELOCs typically come with a draw period (usually 5 to 10 years) during which you can borrow and repay as often as you want, followed by a repayment period (usually 10 to 20 years) when you can no longer draw new money and must pay down the balance. Interest rates on HELOCs are usually variable, meaning they move up and down with the market.

Key Takeaways

  • A HELOC lets you borrow against your home's equity on your own schedule, paying interest only on the amount you use.
  • Your maximum borrowing limit depends on your home's value, how much you still owe on your mortgage, and the lender's lending rules.
  • Most HELOCs have a draw period when you can borrow freely, then a repayment period when you must pay the balance down.
  • Interest rates on HELOCs are usually variable and can rise significantly, which means your monthly payment can increase over time.
  • If you fail to repay a HELOC, the lender can foreclose on your home because it is secured by a second mortgage.

How the draw period and repayment period work

During the draw period, you access your HELOC the way you would a credit card. You receive a checkbook, a debit card, or online access, and you can withdraw money whenever you want up to your credit limit. You are not required to borrow the full amount—you only pay interest on what you actually draw. Minimum payments during this phase are often interest-only, meaning you are not building equity in your home, just covering the cost of borrowing.

When the draw period ends, the repayment period begins. At this point, you can no longer borrow new money. Your account converts to a standard loan structure, and you must begin paying down the principal balance along with interest. Monthly payments jump significantly because you are now repaying the full loan, not just interest. If you borrowed $30,000 during the draw period and paid back only $5,000, you now owe $25,000 plus interest, and that amount must be paid off over the repayment period.

Some lenders offer the option to renew your HELOC when the draw period ends, but renewal is not may provide. The lender will reassess your home's value, your credit, and your income. If your home has lost value or your financial situation has weakened, renewal may be denied or offered at a higher rate.

Variable interest rates and payment risk

Most HELOCs carry variable interest rates, which means the rate changes based on a benchmark rate set by the Federal Reserve and the lender's margin. When the benchmark rises, your rate rises, and so does your monthly payment. When rates fall, your payment falls. This flexibility is attractive when rates are low, but it creates real risk if rates climb.

For example, if you open a HELOC at 6 percent and borrow $20,000, your interest-only payment might be $100 per month. If rates rise to 9 percent over the next few years, that same $20,000 now costs $150 per month—a 50 percent increase. During the repayment period, when you are also paying down principal, the impact is even steeper. A payment that was manageable at 5 percent can become unaffordable at 8 or 9 percent.

Some lenders offer fixed-rate HELOCs or the option to convert part of your balance to a fixed rate, but these usually come with higher interest rates or fees. If you choose a variable rate, budget for the possibility that your payment could rise significantly.

How a HELOC differs from a home equity loan

A home equity loan is a one-time loan for a fixed amount. You receive the money in a lump sum, the interest rate is fixed, and you repay it over a set term—usually 5 to 15 years. Your monthly payment never changes. A HELOC, by contrast, is revolving credit that you can tap into repeatedly, with a variable rate and a draw period followed by a repayment period.

Choose a home equity loan if you know exactly how much you need and want predictable payments. Choose a HELOC if you want flexibility to borrow over time and do not mind that your rate and payment can change. Both are secured by your home, so both carry the risk of foreclosure if you stop paying.

Costs and fees associated with a HELOC

Beyond interest, HELOCs often come with upfront and ongoing costs. An origination fee (typically 1 to 5 percent of the credit limit) is charged when you open the account. An appraisal fee ($300 to $700) is required so the lender can verify your home's value. Some lenders charge an annual maintenance fee ($50 to $150 per year) just to keep the account open, even if you do not borrow anything.

If you close the account within a certain period (often 3 to 5 years), some lenders charge an early closure fee. A few lenders charge a draw fee each time you access your credit, though this is less common. Read the disclosure documents carefully before you sign—the Truth in Lending Act requires lenders to provide a clear breakdown of all costs.

When a HELOC makes sense and when it does not

A HELOC can be useful if you have a large, ongoing expense you want to fund gradually—a home renovation, a child's education, or a business startup. Because you pay interest only on what you borrow, you avoid paying for money you do not yet need. It can also serve as an emergency fund: if you have a HELOC open but unused, you have access to cash without having to apply for a new loan in a crisis.

A HELOC is risky if you are already struggling with debt, because it is easy to borrow more than you can repay. It is also risky if you cannot absorb a payment increase, because variable rates can rise sharply. If you are counting on refinancing or selling your home to pay off the balance, you are betting on future conditions you cannot control. And if you lose your job or your home's value drops, you may find yourself unable to borrow more or refinance when you need to.

What happens if you cannot repay a HELOC

If you miss payments on a HELOC, the lender reports the delinquency to credit bureaus, and your credit score drops. After 120 days of missed payments, the lender can begin foreclosure proceedings. Because a HELOC is secured by a second mortgage on your home, the lender has the legal right to force a sale of your property to recover the debt.

If you are struggling to make payments, contact your lender immediately. Some lenders offer forbearance (temporarily reduced or suspended payments), loan modification, or a conversion to a fixed rate. These options are not may provide, but they are worth asking about before you fall behind. Once foreclosure begins, your options narrow significantly.

Frequently Asked Questions

Can I use a HELOC for anything I want?

Yes. Once you have access to the funds, you can use them for any purpose—home repairs, debt consolidation, education, travel, or anything else. The lender does not restrict how you spend the money. However, using a HELOC for high-risk purposes (like gambling or speculative investments) can leave you in debt with no asset to show for it.

What if my home's value drops after I open a HELOC?

Your lender may freeze or reduce your credit limit if your home loses significant value. In some cases, lenders have closed HELOCs entirely during housing downturns. If you have already borrowed money, you still owe it, but you may not be able to borrow more.

Is a HELOC better than a credit card for large expenses?

A HELOC usually has a lower interest rate than a credit card, so it costs less to borrow. However, a credit card does not put your home at risk. If you default on a credit card, the lender cannot foreclose. Choose based on the amount you need, how long you will take to repay, and whether you can afford the risk.

Can I have a HELOC if I still have a mortgage?

Yes. A HELOC is a second mortgage, so you can have both. Your first mortgage lender has priority if you default and the home is sold. The HELOC lender is paid only after the first mortgage is satisfied, which is why HELOC rates are usually higher than mortgage rates.

What happens to my HELOC if I sell my home?

When you sell, the proceeds go first to pay off your first mortgage, then to pay off your HELOC balance. If the sale price is not enough to cover both, you may owe the difference. If there is money left over after both mortgages are paid, it is yours to keep.