The Short Answer
A HELOC — short for home equity line of credit — is a revolving line of credit that lets you borrow against the equity in your home. Instead of getting a lump sum, you’re approved for a credit limit and can borrow what you need, when you need it, much like a credit card. You pay interest only on the amount you actually borrow.
Because your home secures the loan, a HELOC usually offers a lower interest rate than unsecured borrowing like credit cards — but it also puts your home at risk if you can’t repay.
What Is Home Equity?
Home equity is the portion of your home you actually own — your home’s current market value minus what you still owe on your mortgage. A HELOC lets you tap a share of that equity.
Example: Your home is worth $400,000 and you owe $250,000 on your mortgage. You have $150,000 in equity. A lender might let you borrow up to a percentage of your home’s value (often around 80% to 85%) minus your mortgage balance — which could make a HELOC of roughly $70,000 to $90,000 available.
The Two Phases of a HELOC
A HELOC works in two stages:
- The draw period (often about 10 years) — you can borrow from the line as needed, repay, and borrow again. Payments during this time are frequently interest-only, keeping them low.
- The repayment period (often about 20 years) — the draw period ends, you can no longer borrow, and you repay the outstanding balance plus interest in regular payments. Payments typically jump at this point because you’re now paying down principal too.
That jump from interest-only to full principal-and-interest payments is one of the most important things to plan for with a HELOC.
HELOC vs. Home Equity Loan
Both let you borrow against your equity, but they’re structured differently:
- A HELOC is a revolving line you draw from as needed, usually with a variable interest rate. Good for ongoing or uncertain expenses.
- A home equity loan gives you a single lump sum up front at a fixed rate, repaid in equal payments. Good for a one-time, known expense.
If you need flexibility and aren’t sure of the total cost, a HELOC fits. If you have one large, fixed expense and want predictable payments, a home equity loan may be better.
Common Uses for a HELOC
- Home improvements — renovations that can also increase your home’s value
- Debt consolidation — paying off higher-interest debt with lower-rate borrowing (though this moves unsecured debt onto your home)
- Major expenses — such as medical bills or education costs
- An emergency backstop — some homeowners open a HELOC to have available credit on hand, even if they don’t use it right away
The Risks to Understand
A HELOC is convenient and relatively low-cost, but it carries real risks:
- Your home is collateral. If you can’t repay, you could face foreclosure — a far higher stake than missing a credit card payment.
- Variable rates. Most HELOCs have variable interest rates, so your payment can rise if rates increase.
- Payment shock. When the repayment period begins, payments can climb sharply.
- Temptation to overspend. Easy access to a large credit line can lead to borrowing more than you can comfortably repay.
The Bottom Line
A HELOC is a flexible, revolving line of credit secured by your home equity, with a draw period for borrowing and a repayment period for paying it back. It can be a low-cost way to fund home improvements or consolidate debt — but because your home is on the line and rates are usually variable, it’s a tool to use carefully and with a clear repayment plan.
Frequently Asked Questions
How is a HELOC different from a home equity loan?
A HELOC is a revolving line of credit you draw from as needed, usually at a variable rate. A home equity loan gives you a single lump sum up front at a fixed rate. A HELOC offers flexibility; a home equity loan offers predictable payments for a one-time expense.
How much can I borrow with a HELOC?
Lenders typically let you borrow up to about 80% to 85% of your home’s value, minus what you still owe on your mortgage. Your income, credit score, and the lender’s rules also affect your limit.
What is the draw period on a HELOC?
The draw period, often around 10 years, is when you can borrow from the line, repay, and borrow again. Payments during this phase are often interest-only. After it ends, you enter the repayment period and can no longer draw.
Can I lose my home with a HELOC?
Yes, that’s the main risk. Because a HELOC is secured by your home, defaulting on payments can lead to foreclosure. That’s why it’s important to borrow only what you can repay and to plan for the payment increase in the repayment period.
Do HELOCs have variable interest rates?
Most do, meaning your rate and payment can change over time as market rates move. Some lenders offer fixed-rate options or let you lock in a portion of your balance, so ask about the rate structure before you borrow.
Is HELOC interest tax deductible?
It may be, but generally only when the funds are used to buy, build, or substantially improve the home that secures the loan — and rules can change. Check current IRS guidance or consult a tax professional for your situation.