What is a HELOC (home equity line of credit)?

A home equity line of credit (HELOC) lets you borrow against the equity you've built in your home — the difference between your home's current market value and your remaining mortgage balance. Unlike a home equity loan (which is a lump sum), a HELOC works like a credit card: you have a set credit limit, you draw from it as needed, and you only pay interest on what you've borrowed. A HELOC is a common but risk-bearing type of second mortgage.

Draw period vs. repayment period

HELOCs typically have two phases. During the draw period (often 10 years), you can borrow and repay repeatedly. Many lenders require interest-only payments during this phase. At the end of the draw period, the line closes and you enter the repayment period (often 10–20 years), during which you pay back both principal and interest. Your monthly payment can jump significantly at this transition — a risk worth planning for.

Interest rates and how they work

• Most HELOC rates are variable, tied to a benchmark like the prime rate. Your rate — and payment — can rise or fall.
• Some lenders offer a fixed-rate option that lets you lock a portion of the balance at a fixed rate.
• Interest is only charged on the amount you've drawn, not your full credit limit.
• Introductory or promotional rates may apply in the first few months — review when they expire.

How lenders determine your HELOC limit

Lenders typically allow you to borrow up to 80–85% of your home's appraised value, minus what you still owe on your primary mortgage. Example: $400,000 home value × 85% = $340,000 maximum equity base, minus $250,000 remaining mortgage = $90,000 potential HELOC limit. Your credit score, income, and debt-to-income ratio also factor into approval and the specific limit offered.

Key risks of a HELOC

Because your home is the collateral, missed payments can put your home at risk of foreclosure. Variable rates mean payments can increase if benchmark rates rise. Understand all terms before opening a HELOC, including what happens at the end of the draw period and whether the lender can freeze or reduce the line if your home's value falls.