HELOC (Home Equity Line of Credit)
A HELOC is a revolving line of credit secured by your home equity, working much like a credit card with your home as collateral. During the draw period (typically 10 years), you can borrow, repay, and borrow again up to your credit limit. After the draw period, you enter a repayment period (typically 20 years) where you pay down the outstanding balance.
HELOCs typically allow you to borrow up to 85% of your home's value minus your current mortgage balance. On a $600,000 home with a $350,000 mortgage, you might qualify for a $160,000 HELOC ($600K × 85% = $510K minus $350K owed). Interest rates are variable — most HELOCs are priced at the prime rate plus a margin (e.g., prime + 0.5%), so payments fluctuate with market rates.
During the draw period, many HELOCs allow interest-only payments, keeping costs low. Be aware that when you transition to the repayment period, your payment can jump substantially as you now must pay both principal and interest. Planning for this payment shock is critical.
HELOCs are popular for home renovations, tuition, debt consolidation, or emergency reserves. Interest may be tax-deductible when funds are used for home improvements (consult your tax advisor). Unlike a cash-out refinance, a HELOC doesn't disturb your existing first mortgage — valuable if you have a low fixed rate you want to preserve.
Key Takeaway
A HELOC is a revolving line of credit secured by your home equity, working much like a credit card with your home as collateral. During the draw period (typically 10 years), you can borrow, repay, and borrow again up to your credit limit. After the draw period, you enter a repayment period (typically 20 years) where you pay down the outstanding balance.
Related Terms
Frequently Asked Questions
A HELOC is a revolving credit line with a variable rate — you draw as needed. A home equity loan is a lump-sum loan with a fixed rate and fixed payments.
Yes. A HELOC is secured by your home. If you don't make payments, the lender can foreclose just as a first mortgage lender can.
Most lenders allow you to borrow up to 80–85% of your home's value minus your existing mortgage balance.
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