HELOC
A HELOC (Home Equity Line of Credit) is a revolving credit line secured by your home that lets you borrow against your equity as needed — think of it as a credit card backed by your house, with much lower interest rates.
If your home is worth $400,000 and you owe $250,000, you have $150,000 in equity. Most lenders will let you borrow up to 80%–85% of your home’s value minus what you owe, giving you a HELOC of roughly $70,000–$90,000. You draw what you need, when you need it, and only pay interest on what you’ve actually borrowed.
How a HELOC Works
A HELOC has two phases:
Draw period (typically 5–10 years). You can borrow up to your credit limit, repay, and borrow again — just like a credit card. Most HELOCs require interest-only minimum payments during this phase. On a $50,000 balance at 8.5%, that’s about $354/month. You can pay more if you want, and any principal you pay down becomes available to borrow again.
Repayment period (typically 10–20 years). The line of credit closes. You can’t borrow any more. Your remaining balance converts to a fixed repayment schedule with principal and interest payments. This is where the payment shock hits — if you were only making interest payments for 10 years, your monthly payment could double or triple when repayment kicks in.
HELOC Rates
HELOCs almost always have variable interest rates tied to the prime rate. As of 2026, that means rates in the 8%–9.5% range for most borrowers. When the Fed cuts rates, your HELOC payment drops. When rates rise, so does your payment.
Some lenders offer a fixed-rate option that lets you convert part or all of your balance to a fixed rate. You’ll pay a slightly higher rate, but your payment becomes predictable. Worth considering if you’re borrowing a large amount and can’t stomach payment fluctuations.
| HELOC Feature | Typical Terms |
|---|---|
| Draw period | 5–10 years |
| Repayment period | 10–20 years |
| Rate type | Variable (prime + margin of 0.5%–2%) |
| Max LTV (combined) | 80%–85% of home value |
| Minimum draw | $0–$10,000 (varies by lender) |
| Annual fee | $0–$75 |
| Closing costs | $0–$2,000 (many lenders waive them) |
| Early closure penalty | Some charge if closed within 2–3 years |
HELOC vs. Home Equity Loan
A home equity loan gives you a lump sum at a fixed rate. You get all the money upfront and repay it in fixed monthly installments. A HELOC gives you a credit line you draw from as needed at a variable rate.
Choose a HELOC if: You need flexibility, aren’t sure how much you’ll borrow, or want to use funds over time (like a multi-phase renovation). The revolving structure means you only pay interest on what you use.
Choose a home equity loan if: You need a specific amount for a specific purpose (like consolidating $40,000 in credit card debt) and want payment certainty. The fixed rate protects you from rising interest rates.
Common HELOC Uses
- Home renovations — the interest may be tax-deductible if the funds improve your home
- Emergency fund backup — having a $50,000 HELOC open costs nothing if unused
- Debt consolidation — replace 22% credit card debt with 8.5% HELOC debt (risky if you don’t change spending habits)
- Education expenses — sometimes cheaper than private student loans
HELOC Qualification Requirements
Getting approved for a HELOC requires:
- Credit score: 680+ for most lenders (some go to 620 with higher rates)
- Combined LTV: Your first mortgage balance plus the HELOC can’t exceed 80%–85% of your home’s value
- DTI ratio: Under 43%–50%, including the HELOC’s monthly payment
- Stable income: Two years of tax returns and recent pay stubs
- Sufficient equity: At least 15%–20% equity after accounting for your first mortgage
The appraisal is the wildcard. If your home appraises lower than expected, your available credit line shrinks. In markets where values have plateaued or dipped, this catches people off guard.
Tax Deductibility
HELOC interest is tax-deductible only if the funds are used to buy, build, or substantially improve the home that secures the loan. Using a HELOC for a kitchen renovation? Deductible. Using it to pay off credit cards or fund a business? Not deductible. The IRS changed these rules in 2018, and they’re still in effect. Keep receipts and documentation proving how you used the funds.
Watch out for: A HELOC is a second mortgage. If you can’t make payments, the lender can foreclose on your home. Using home equity for vacations, cars, or lifestyle spending is genuinely dangerous. You’re converting unsecured wants into secured debt against your most valuable asset.
For a full side-by-side, read our HELOC vs. home equity loan comparison.
Frequently Asked Questions
Can the bank freeze or reduce my HELOC?
Yes. If your home value drops significantly, your credit situation worsens, or economic conditions deteriorate, the lender can freeze your line of credit — meaning you can’t borrow any more (though existing balances still need to be repaid). This happened widely during 2008–2009. Don’t count on HELOC funds being available indefinitely.
When does a HELOC make more sense than a cash-out refinance?
When you have a low rate on your first mortgage that you don’t want to lose. A cash-out refi replaces your entire mortgage — if your existing rate is 3.5% and current rates are 7%, refinancing to access $50,000 costs you thousands per year in higher interest on the full balance. A HELOC adds a second payment but keeps your cheap first mortgage intact. Use our HELOC calculator to model different scenarios, and compare against a cash-out refinance to see which option costs less for your situation.