A Home Equity Line of Credit, or HELOC, is a revolving line of credit that allows you to borrow against the equity in your home. Unlike a home equity loan, which distributes a lump sum at a fixed rate, a HELOC works similarly to a credit card. You are approved for a maximum credit limit, and you can borrow, repay, and borrow again as needed during a set time frame.
A HELOC is divided into two distinct phases: - Draw Period (typically 10 years): The time during which you can actively borrow money from the line of credit. Your monthly payments are usually interest-only, calculated based on the amount you have actually drawn, resulting in very low initial payments. - Repayment Period (typically 15 to 20 years): You can no longer borrow money. The outstanding balance is amortized, and you must make monthly payments consisting of both principal and interest, causing your payment to rise sharply.
To see how a fixed-rate second mortgage compares, see our home equity loan calculator or check our general primary mortgage calculator.
Most HELOCs carry variable interest rates tied to an index like the U.S. Prime Rate plus a margin charged by the lender. When market interest rates rise, the Prime Rate increases, which raises your variable rate and monthly interest payments. Some lenders allow you to lock in a fixed rate on specific portions of your drawn balance to protect your budget from rising rates.
To check standard fixed loan amortization tables, try our standard loan calculator or check the loan repayment solver.
The biggest risk of a HELOC is "payment shock" when transitioning from the draw period to the repayment period. Because payments go from interest-only to fully amortized (principal plus interest), your monthly payment can double or triple, especially if interest rates have risen during the draw period. Borrowers must plan ahead for this transition.
To compare this option with replacing your entire primary mortgage, check our mortgage refinance calculator or check our general interest rate tool.
Similar to home equity loans, HELOC limits are calculated using your Combined Loan-to-Value (CLTV) ratio, which is typically capped at 80% to 85% of your home's appraised value. The lender subtracts your primary mortgage balance from this limit to determine your maximum line of credit.
Because you only pay interest on the money you actually spend, a HELOC is highly efficient for ongoing projects with variable costs, serving as an excellent emergency reserve for homeowners.
Like home equity loans, HELOC interest is only tax-deductible if the borrowed funds are spent directly on purchasing, building, or substantially improving the property that secures the line of credit.