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How a HELOC Works

Last reviewed October 2026 · General information, not financial advice

What a HELOC is

A home equity line of credit, or HELOC, lets you borrow against the equity in your home. Equity is the difference between what your home is worth and what you still owe on it. Instead of receiving one lump sum, you get a credit limit and draw from it as needed, a little like a credit card that is secured by your house.

A HELOC is usually a second lien. Your existing mortgage stays in place with its current rate and payment, and the HELOC sits behind it.

The two phases

Draw period

During the draw period, often around ten years, you can borrow, repay and borrow again up to your limit. Many lenders require only interest payments on what you have drawn during this phase. That keeps payments low, but it also means the balance does not shrink unless you pay extra.

Repayment period

When the draw period ends, you can no longer borrow. You repay the outstanding balance, principal and interest, over a set term that is commonly ten to twenty years. Because principal is now included, the monthly payment can be noticeably higher than it was during the draw period. Some HELOCs instead require the full balance at the end of the draw period, known as a balloon payment. Check which kind you are being offered.

How the interest rate works

Most HELOC rates are variable. The lender takes a published index, commonly the prime rate, and adds a margin that depends on your credit profile and how much equity you have. When the index moves, your rate and payment move with it. Your agreement must state a maximum rate the line can ever reach.

Some lenders let you lock part of your balance at a fixed rate. If predictability matters to you, ask whether that option exists and what it costs.

What it can cost

Costs vary by lender, and not every lender charges every fee. Ask about each of these before you commit:

• Upfront costs such as an appraisal, title search, and origination or application fees.
• Annual or maintenance fees for keeping the line open.
• Inactivity or minimum-draw requirements if you do not use the line.
• Early closure fees if you close the line within the first few years.

Risks to understand first

• Your home secures the debt. Falling behind on a HELOC can lead to foreclosure, just as with a mortgage.
• Payments can rise twice: when rates go up, and when the repayment period begins.
• The line can be reduced or frozen. Federal rules allow a lender to do this in certain situations, such as a significant drop in your home's value.
• Selling means repaying. The HELOC balance is paid off from the sale proceeds, along with your mortgage.

Protections you have

For a HELOC on your primary residence, federal law generally gives you three business days after closing to cancel for any reason, called the right of rescission. Lenders must also give you disclosures describing the rate, fees and payment terms before you open the line. Read them, and ask about anything that is unclear.

A note on taxes

Under current IRS rules, interest on a HELOC may be deductible only when the money is used to buy, build or substantially improve the home that secures the loan, and only if you itemize. Tax rules change and depend on your situation, so check with a tax professional.

This guide is general information to help you ask better questions. It is not financial, legal or tax advice, and it is not an offer of credit. Loan terms, eligibility and costs are set by each lender and vary by state and by borrower.