What Is a HELOC? Home Equity Line of Credit Explained
A HELOC (Home Equity Line of Credit) lets you borrow against the equity in your home — similar to a credit card secured by your house. You draw what you need, when you need it, and pay interest only on the outstanding balance. Here's how it works.
How a HELOC Works
A HELOC has two phases: the draw period (typically 10 years) during which you can borrow, repay, and borrow again up to your credit limit; and the repayment period (typically 20 years) during which the line closes to new draws and you repay the outstanding balance.
During the draw period, most HELOCs require interest-only payments on the balance you've drawn. During the repayment period, payments include both principal and interest. Monthly payments can jump significantly at the transition — this is called payment shock, and it's important to plan for it.
How Much Can You Borrow with a HELOC?
Most lenders allow you to borrow up to 85–90% of your home's appraised value, minus your first mortgage balance. The formula: (Home value × 85%) − First mortgage balance = Maximum HELOC credit line.
Example: $500,000 home value × 85% = $425,000. Minus $300,000 first mortgage = $125,000 maximum HELOC. Your actual approval may be lower based on your credit score, income, and the lender's specific guidelines.
HELOC Interest Rates
HELOC rates are variable — they float with the prime rate (which moves with the federal funds rate). When the Fed raises rates, your HELOC rate goes up. When rates fall, it goes down. Most HELOCs are expressed as prime + a margin (e.g., prime + 0.5%).
This variability is the primary risk of a HELOC. In a rising rate environment, your interest payments can increase significantly. Some lenders offer rate caps or a fixed-rate conversion option for outstanding balances.
HELOC vs. Cash-Out Refinance
A cash-out refinance replaces your first mortgage with a larger one and gives you the difference as cash — at a fixed rate, with a reset amortization clock. A HELOC is a second lien that doesn't touch your first mortgage — the rate is variable, and you only borrow what you need.
Cash-out refinance is better when: rates are lower than your existing mortgage, you want a fixed rate, or you want a large lump sum. HELOC is better when: your existing mortgage rate is lower than current refinance rates (you don't want to touch it), you need flexibility to draw over time, or you need a smaller or uncertain amount.
Common Questions
How long does it take to get a HELOC?
The HELOC application and approval process typically takes 2–6 weeks, similar to a mortgage. It requires an appraisal (sometimes a desktop or drive-by appraisal), income verification, and a title search. Some lenders offer faster turnaround for existing customers.
Is HELOC interest tax deductible?
HELOC interest is deductible only when the funds are used to buy, build, or substantially improve the home securing the HELOC. Using a HELOC for debt consolidation, education, or other purposes does not qualify for the deduction. Consult a tax advisor for your specific situation.
What happens if I can't make my HELOC payments?
A HELOC is a lien on your home. If you default, the lender can foreclose, just like your first mortgage. Because a HELOC is typically a second lien, the first mortgage lender would be paid first in a foreclosure, making HELOC lenders more cautious about extending credit at high combined loan-to-value ratios.
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