A HELOC — a home equity line of credit — is a revolving line of credit secured by the equity in your home: the lender approves a maximum amount, you borrow against it, repay, and borrow again during a draw period that commonly lasts about 10 years, and when that period ends you enter a repayment period, often 10 to 20 years, in which you pay the remaining balance off and can borrow no more. Interest is charged only on what you have actually drawn, usually at a variable rate, so payments can rise even if you never borrow again. And the term that governs everything else is the collateral: as the Consumer Financial Protection Bureau puts it, only consider a HELOC if you are confident you can keep up with the payments — if you fall behind or cannot repay on schedule, you could lose your home.
That last sentence is not boilerplate. Defaulting on a credit card wrecks your credit score. Defaulting on this can take the house, because the house is the security. Keep that exchange in mind throughout: flexibility and a lower rate than unsecured borrowing, bought with your home as the guarantee.
What is home equity?
Equity is the part of your home you actually own, in money terms: your home’s current value minus what you still owe on your mortgage. A home worth $400,000 with $240,000 left on the mortgage holds $160,000 of equity. A HELOC does not lend against the home’s full value or even against all of that equity — lenders keep a cushion, which is where the borrowing limit comes from, below.
Equity is not cash and it is not stable. It grows as you pay the mortgage down and as prices rise, and it shrinks — fast, sometimes — when prices fall. Borrowing against it converts that paper slice of ownership into real debt, due in bad years as faithfully as in good ones.
How does a HELOC work? The draw period and the repayment period
A HELOC lives in two distinct phases, and most of the trouble borrowers meet is standing exactly on the border between them.
The draw period. For a set number of years — the CFPB gives 10 years as its example, and your agreement sets the actual term — you can draw up to your credit limit whenever you choose, typically by special cheques, a card, or a transfer. Repay part of the balance and that credit becomes available again, like a card’s. Many plans set a minimum monthly payment based on your current balance; some require only interest, which means the balance does not fall unless you pay extra on purpose. Some plans also impose minimums the other way — the CFPB’s example is a required draw of at least $300 at a time, or a compulsory initial draw when the line opens. Ask before you sign, not after.
The repayment period. When the draw period ends, the door closes: no new borrowing, and the outstanding balance must be repaid. The CFPB describes the usual shape — the lender sets a schedule to repay the full balance, often over 10 or 20 years — and the trap inside it: monthly payments are often significantly higher in this phase, because you are now paying principal on the whole balance as well as interest. In some plans there is no schedule at all: the entire balance falls due at once when the draw period ends, a balloon payment, which in practice means refinancing, selling, or finding a very large sum. Which of those endings your plan has is a clause in your agreement. Know it on day one.
Put numbers on the jump, at a steady 7% rate on a $50,000 balance. Interest-only in the draw period costs about $292 a month — and leaves the balance at $50,000, untouched. Repay that same balance over 15 years and the payment is about $449 a month; over 10 years, about $581. And that illustration holds the rate still, which a variable rate will not do. Budget for the repayment payment, not the draw payment, and the product loses most of its power to shock you. Costs connected with the home and the loan, such as the taxes and insurance handled through escrow, continue alongside all of this — a HELOC payment is an addition to your housing costs, never a replacement for them.
HELOC interest rates: why “variable” is the word that matters
HELOCs usually have a variable interest rate, in the CFPB’s words, so your payments may change from month to month. The rate is normally built as a public index — the US prime rate is the common one — plus a margin set by the lender, and it moves when the index moves. Under the federal rules for these plans, a lender generally cannot simply choose a new rate: it must follow the index named in your agreement, one it does not control and that is available to the public.
Three consequences follow. First, a low opening rate is a snapshot, not a deal — some plans open with a discounted introductory rate that expires into the full index-plus-margin rate. Second, your payment can rise in a month when you borrowed nothing, purely because the index rose. Third, some HELOCs let you convert part or all of a balance to a fixed rate — the CFPB notes the fixed rate is usually higher, and buys predictability rather than cheapness.
Read APR on a HELOC with care: for an open-end line like this, the disclosed APR is based on interest alone and does not fold in other charges the way a closed-end loan’s APR does — one reason comparing APR with APR needs the two loans to be the same kind before it means anything.
How much can you borrow? CLTV and the equity cushion
Lenders size a HELOC with a ratio called combined loan-to-value, or CLTV: everything secured by your home — the first mortgage, the proposed line, any other home-secured debt — divided by the home’s value. The lender caps that ratio, which is another way of saying it requires you to keep a slice of equity untouched. The CFPB’s guidance is that lenders typically require you to keep at least 10% to 20% of your home’s value as equity — in other words, caps commonly land somewhere around 80% to 90% CLTV, set by each lender, product and borrower, not by any universal rule.
That is why the flat claim found across comparison sites — “a HELOC is capped at 85%” — misleads. Eighty-five percent is one common cap, quoted as if it were the law. It is not. Run the same home through three plausible caps:
| Home value $400,000, mortgage $240,000 | Maximum total secured debt | Largest possible line |
|---|---|---|
| 80% CLTV cap | $320,000 | $80,000 |
| 85% CLTV cap | $340,000 | $100,000 |
| 90% CLTV cap | $360,000 | $120,000 |
The formula, whichever cap your lender uses, is: (home value × CLTV cap) − what you already owe = your maximum line. Your approved limit can be lower still — income, debts and credit history all feed the decision — and the limit is a ceiling, not a recommendation. Nothing in the arithmetic says borrowing the maximum is wise.
What do you need to qualify for a HELOC?
The lender is underwriting two things at once: the property and you. Expect scrutiny of all of the following, because every serious lender checks some version of each:
- Equity. Enough to satisfy the CLTV cap above, verified by an appraisal of the home.
- Credit history and score. Requirements are the lender’s own, not set by law, so no single threshold can be honestly quoted as the requirement — guides that print one score as universal are printing one lender’s policy. A stronger record generally earns a larger line and a lower margin; check what a good credit score is for the ranges.
- Income and debts. Proof of income, and a debt-to-income calculation that includes the new payment — sensibly assessed at its repayment-period size, not its interest-only size.
- The property itself. Some plans require you to live in the home as your primary residence, which can restrict renting it out, and selling the home generally means paying the line off in full at the sale.
One right is worth knowing: for a line secured by your main home, federal law gives you three business days to cancel after closing without penalty. The Federal Trade Commission’s guide to home equity loans and lines of credit sets out that right and its limits.
HELOC vs home equity loan: what is the difference?
These two are confused constantly, including being filed under each other’s names, so the CFPB’s clean split is worth using. A home equity loan is a specific amount borrowed against your equity, paid to you in one lump sum, repaid in scheduled instalments, at a fixed or adjustable rate. A HELOC is a line you draw from repeatedly, where payments replenish the available credit, usually at an adjustable rate, with payments that vary with the balance outstanding. If you already have a first mortgage, the CFPB notes, either product sits behind it as a second mortgage — a second payment, on top of the first, every month.
| HELOC | Home equity loan | |
|---|---|---|
| You receive | A credit limit you draw from as needed | One lump sum, in full, at closing |
| Interest charged on | Only the amount currently drawn | The whole amount, from day one |
| Rate | Usually variable | Often fixed; can be adjustable |
| Repayment | Draw period, then a repayment period — payments jump between them | Fixed schedule from the start |
| Fits best | Costs arriving in stages, or an amount you cannot yet pin down | One known cost, in one amount, now |
The “is a HELOC a second mortgage?” question dissolves in that table: in the common case where a first mortgage exists, yes — the line is a further loan secured by the same home, junior to the first. What it is not is a refinancing of that first mortgage, which stays exactly as it was.
Is HELOC interest tax deductible?
Only under a narrow test, and this is the point on which older articles and loose summaries still mislead. Under IRS Publication 936, interest on a home equity line is deductible only if the borrowed funds are used to buy, build, or substantially improve the home that secures the loan — and you must itemise deductions, and the deduction counts only interest on debt within the overall mortgage limits ($750,000 of such debt for most filers, $375,000 if married filing separately, for debt from after December 15, 2017). The IRS states the negative just as plainly: to the extent the proceeds were not used that way, the interest is not deductible, no matter when the debt was taken on.
So the honest answer to “may be tax deductible,” the phrase comparison sites favour, is: deductible for a kitchen rebuild charged to the line, not deductible for the same line used to clear credit cards, pay tuition or take a holiday. Same account, same rate, opposite tax answers — because the test follows the money’s use, not the product’s name. Keep improvement draws documented separately, and take your own position to a tax professional.
What are the risks and costs of a HELOC?
The benefits are real — flexible access, interest only on what you use, a rate usually below unsecured borrowing. The risks are the price of exactly those features:
- Your home is the collateral. Fall behind, or reach the end of the repayment period unable to pay, and the lender can foreclose. This risk has no equivalent in unsecured credit, and it does not expire.
- The rate can rise. Variable means variable: payments grow when the index grows, on a balance you may no longer be adding to.
- The payment can jump. The draw-to-repayment transition detailed above is the single most predictable HELOC shock, and the least prepared for.
- The line can shrink or freeze. If your home’s value drops significantly, the CFPB warns, your lender may stop further draws; the same can happen if your financial circumstances change and the lender concludes you cannot make the payments. A line you were counting on for a project’s second half can close after its first.
- Fees layer quietly. Beyond interest, plans can carry application and appraisal costs, closing costs, an annual fee, transaction fees and inactivity fees — the CFPB’s HELOC booklet, which lenders must give applicants, lists the categories to ask about and includes a worksheet for comparing three offers side by side. Use it: three written estimates beat any single headline rate.
Used for a staged renovation, drawn slowly and repaid deliberately, a HELOC is a tidy tool. Used as a second income, it is a slow transfer of your house to your lender, with interest.
Frequently asked questions
Can a HELOC be fixed-rate? Usually the rate is variable. Some plans let you convert some or all of an outstanding balance to a fixed rate, typically at a higher rate than the variable one at the time — you are paying for certainty. The CFPB describes conversion as a feature of some HELOCs, not a standard term.
Does a HELOC hurt your credit score? It is reported as revolving credit secured by your home, so it behaves in the familiar ways: opening it involves a credit check, a high drawn balance relative to the limit weighs on utilisation, and missed payments damage a score as missed payments do. The graver consequence of falling behind is not the score, though — it is the lien on the house.
This article is general information about how HELOCs work in the United States, checked in November 2026 against CFPB, FTC and IRS publications — not financial, legal or tax advice. Terms, caps and fees are set by each lender; read your agreement and compare written offers before borrowing against your home.