A home equity line of credit, or HELOC, is a flexible way to borrow against the equity in your home without refinancing your primary mortgage. It works much like a credit card: you get a revolving credit line that you can draw from as needed, and only pay interest on what you use.
HELOCs are ideal for homeowners who want to fund expenses like home improvements, college tuition, or ongoing medical bills—especially when the exact cost or timing isn’t set in stone.
This guide explains how HELOCs work, how they differ from home equity loans, how to qualify, and when a HELOC might (or might not) be the right fit.
- HELOCs give you flexible access to your home’s equity—you only borrow (and pay interest on) what you use, making them ideal for phased or unpredictable expenses.
- Most HELOCs have variable interest rates, which means your payments can rise over time—so it’s important to budget ahead and pay down principal when possible.
- HELOC funds are typically accessed via bank transfers, special checks, or a linked card, giving you convenient, on-demand borrowing without needing to refinance your mortgage.
What Is a HELOC?
A HELOC is a second mortgage that lets you borrow against your home’s equity. Instead of getting a lump sum upfront like a traditional loan, you access a line of credit you can borrow from and repay as needed.
How Much Can You Borrow with a HELOC?
The amount you can borrow depends on your home’s value, your remaining mortgage balance, and your lender’s loan-to-value (LTV) limits. Most lenders allow you to borrow up to 75%–90% of your home’s appraised value, minus your existing mortgage balance.
Example:
- Home value: $400,000
- Mortgage balance: $240,000
- Max LTV: 85%
- $400,000 x 85% = $340,000
- $340,000 – $240,000 = $100,000 available as a HELOC
Minimum and Maximum Loan Sizes:
In addition to the loan-to-value limit set by your home’s value and mortgage balance, lenders usually impose minimum and maximum loan amounts for a HELOC regardless of your available equity.
- Minimum HELOC: Usually $5,000–$10,000, but depends on the lender
- Maximum HELOC: Varies based on your home equity and lender limits—typically up to several hundred thousand dollars
Some lenders also require a minimum annual draw or may charge fees if the line isn’t used, so make sure to confirm terms before applying. Check out our HELOC calculator to see how much you may qualify for.
How Does a HELOC Work?
HELOCs are split into two distinct phases:
1. Draw Period (usually 5–10 Years)
During this time, you can withdraw funds up to your credit limit. You’re usually only required to make interest-only payments, but you can pay down principal anytime.
2. Repayment Period (usually 10–20 Years)
When the draw period ends, the repayment phase begins. You can’t borrow any more, and your monthly payments increase as you now owe both principal and interest.
Some lenders may offer a balloon payment option instead of full amortization, so it’s important to understand the structure of your specific HELOC.
HELOC Interest Rates: What to Expect
Most HELOCs come with variable interest rates, meaning they fluctuate over time. These rates are usually tied to a benchmark index like the prime rate, plus a margin set by your lender.
- Rate caps and floors: Most HELOCs have built-in protections that limit how high or low your interest rate can go.
- Rate adjustment schedule: Some HELOCs adjust monthly, quarterly, or annually.
- Fixed-rate HELOC options: Some lenders offer fixed-rate draws or allow you to convert part of your balance to a fixed rate during the repayment phase.
If interest rate predictability is a priority, ask your lender about fixed-rate conversion options.
HELOC vs. Home Equity Loan: Key Differences
HELOCs and home equity loans are often compared since they’re both second mortgages, or, ways to access your home equity as cash without refinancing your original mortgage.
However, they function differently:
| Feature | HELOC | Home Equity Loan |
| Loan Type | Revolving credit line | Lump-sum loan |
| Rate Type | Usually variable | Usually fixed |
| Repayment | Interest-only during draw; full P+I during repayment | Fixed monthly payments from day one |
| Best For | Flexible or phased expenses | One-time, known-cost expenses |
A home equity loan may be a better fit if you need a specific amount upfront and prefer consistent payments. HELOCs shine when your costs are uncertain or spaced over time.
Check out our full guide to HELOCs vs. Home Equity Loans to learn more.
How to Qualify for a HELOC
Lenders will evaluate your financial situation to determine how much equity you can borrow and on what terms. Each lenders differs, but here’s what they typically look for:
- Home equity: Most lenders require you to retain at least 10% to 20% equity in your home after borrowing.
- Credit score: A score of 660+ is usually the minimum, but 700+ gets better rates.
- Debt-to-income ratio (DTI): Ideally under 43%, including your primary mortgage and the projected HELOC payment.
- Employment and income: You’ll need stable, verifiable income.
Lenders may also consider your home’s location, property type, and whether you’re living in it as a primary residence.
Pros and Cons of HELOCs
Pros
- Borrow only what you need, when you need it
- Lower interest rates than credit cards or personal loans
- Interest may be tax-deductible if the funds are used to buy, build, or substantially improve the home that secures the loan (check with a tax advisor for details).
- Flexible repayment options during the draw period
Cons
- Variable interest rates = unpredictable payments
- Your home is collateral—missed payments could lead to foreclosure
- Access to funds can be frozen or reduced if your home value drops
- Balloon payments or payment shock can hit hard after the draw period
HELOC Closing Costs and Fees
Like other types of mortgages, HELOCs may come with closing costs. These can include:
- Application or origination fees
- Title search or title insurance fees
- Appraisal fees (if required by your lender)
- Annual or inactivity fees charged during the life of the loan
Some lenders may waive certain closing costs or offer no-cost HELOCs, but these often come with higher rates or conditions like keeping the line open for a minimum period.
Be sure to request a full fee breakdown before signing.
Can You Cancel a HELOC?
Yes. You can cancel a HELOC in a few ways, depending on timing:
- Within 3 days of closing: Federal law gives you a right of rescission—meaning you can cancel the HELOC within three business days of signing without penalty.
- After the rescission period: You can pay off the balance and ask your lender to close the line. Some lenders charge a cancellation or early termination fee if you close the HELOC within the first 24–36 months.
Even if the line has a $0 balance, it may still appear on your credit report as available credit until formally closed.
Tips for Managing a HELOC Responsibly
To get the most benefit from a HELOC while minimizing risk, follow these best practices:
- Use it intentionally: Only draw funds when you have a clear, value-building purpose (e.g. home upgrades, tuition).
- Treat it like a loan—not a piggy bank: Avoid using it for day-to-day spending or discretionary purchases.
- Pay more than the minimum: Interest-only payments during the draw period can be tempting, but regularly paying down principal will reduce long-term interest costs and prevent payment shock later.
- Avoid overborrowing: Stick to a realistic budget and don’t borrow more than you need—even if you’re approved for more.
- Set reminders: Use a calendar or budgeting tool to track your draw period, repayment start date, and remaining balance.
A HELOC offers flexibility, but that flexibility requires discipline. Used wisely, it can be a cost-effective financing option. Used casually, it can lead to long-term debt and reduced home equity.
Tip: Want to pay off your HELOC in a certain timeframe? Our HELOC payoff calculator can show you what kind of monthly payments that might require.
Best Uses for a HELOC
HELOCs work best for ongoing or phased expenses that benefit from flexible borrowing:
- Home renovations: Borrow in stages as projects progress
- Education: Pay tuition or expenses semester by semester
- Medical costs: Spread out bills for long-term treatment
- Debt consolidation: Refinance high-interest debt, but only with a solid payoff plan
- Business startup: Caution advised—but can work if you have strong income and a clear budget
Avoid using a HELOC for short-term splurges or to cover monthly budget shortfalls.
How Do You Access HELOC Funds?
Once your HELOC is open, accessing your available credit is easy and works much like tapping a credit card or personal line of credit. Depending on your lender, you can typically:
- Transfer funds from your HELOC to your checking or savings account using online banking
- Write special checks provided by the lender that draw directly from your HELOC balance
- Use a HELOC-linked debit or credit card, which functions just like a credit card but pulls from your credit line
Each method gives you flexibility depending on how you prefer to manage spending.
How to Apply for a HELOC
Check your equity
Estimate your home’s value and subtract your remaining mortgage balance.Shop around
Compare rates, closing costs, draw terms, and rate caps from at least 2–3 lenders.Get prequalified
This can give you an idea of what you can borrow without a hard credit pull.Apply
Submit your application with income verification, credit check, and home value documentation.Close and access funds
Once approved, you’ll receive access to your credit line via checks, card, or online transfer.
Is a HELOC Right for You?
A HELOC can be a powerful tool—especially if you value borrowing flexibility and only want to pay for what you use. But it’s not a fit for everyone.
You may want to consider a home equity loan or a cash-out refinance if:
- You prefer fixed payments
- You need a lump sum up front
- You want to consolidate your mortgage and equity into one payment
Ready to get started? Explore HELOC options and see how much you can borrow with Refi.com.
