What is a HELOC (Home Equity Line of Credit)
A HELOC is a revolving line of credit secured by the equity in your home, allowing you to borrow up to a set limit during a draw period and repay it on a flexible schedule.
A HELOC (Home Equity Line of Credit) is a revolving credit line secured by the equity in your home — the difference between your home's current market value and what you still owe on your mortgage. Rather than receiving a lump sum like a home equity loan, a HELOC works like a credit card: you're approved for a maximum amount and can borrow, repay, and borrow again as needed during a set draw period.
Because the loan is backed by real property, HELOCs typically carry significantly lower interest rates than unsecured debt like credit cards or personal loans.
How a HELOC Works
A HELOC has two distinct phases:
Draw Period (typically 5–10 years)
- You can borrow any amount up to your credit limit
- Monthly payments are often interest-only during this phase
- Repaid funds become available to borrow again
Repayment Period (typically 10–20 years)
- The line of credit closes — no new borrowing
- Payments shift to principal + interest
- Monthly payments increase substantially in this phase
How Much Can You Borrow?
Lenders generally allow you to borrow up to 80–90% of your home's value, minus what you owe on your mortgage.
Formula: (Home Value × 0.85) − Mortgage Balance = Maximum HELOC
| Home Value | Mortgage Balance | Max HELOC (at 85%) |
|---|---|---|
| $400,000 | $200,000 | $140,000 |
| $600,000 | $350,000 | $160,000 |
| $500,000 | $100,000 | $325,000 |
To qualify, lenders typically look at your credit score (usually 620+), your debt-to-income ratio (generally under 43%), and sufficient equity.
HELOC vs. Home Equity Loan
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| Disbursement | Revolving line | Lump sum |
| Interest rate | Usually variable | Usually fixed |
| Monthly payments | Variable (interest-only in draw period) | Fixed |
| Best for | Ongoing expenses, renovations | One-time large expense |
A HELOC's variable rate means your monthly payment can change over time as benchmark rates rise or fall — a meaningful risk consideration.
Common Uses
- Home renovation — The most common use; improvements may even increase the value of the collateral
- Debt consolidation — Paying off high-rate credit card balances with a lower-rate HELOC
- Education expenses — Supplementing funds beyond a 529 plan
- Emergency reserves — Some homeowners open a HELOC as a backup to a traditional emergency fund and never draw on it
Key Risks
A HELOC is secured debt — meaning your home is the collateral. If you borrow heavily during the draw period and can't make payments when the repayment phase begins (sometimes called "payment shock"), the lender can foreclose. Using home equity for depreciating assets (vacations, cars) or consumer spending is widely considered poor financial practice.
HELOC as a Financial Tool
Used strategically — for value-adding home improvements or consolidating genuinely high-interest debt — a HELOC can be a cost-effective borrowing tool for homeowners with significant equity. The key is borrowing only what you can confidently repay and avoiding treating home equity as discretionary income.
Before opening a HELOC, compare offers from multiple lenders. Terms — particularly the margin added to the benchmark rate — vary significantly across institutions.