A HELOC is a home equity line of credit: a revolving credit line secured by your home that lets you borrow against the equity you have built up, repay it, and borrow again. It works more like a credit card than a mortgage — you are approved for a limit, you draw only what you need, and you pay interest only on what you have drawn. For homeowners who bought when rates were low and do not want to refinance, it has become the most popular way to tap home equity without touching the first mortgage.
This guide explains what a HELOC is, how its two phases work, how much you can borrow, what it costs, how it differs from a home equity loan, and the risks worth knowing before you borrow. It is general educational information only, not personal financial advice. The structure and rules below follow the Consumer Financial Protection Bureau (CFPB), which regulates HELOC disclosures, and the Internal Revenue Service (IRS) rules on when the interest is deductible.
What Is a HELOC?
A home equity line of credit is a revolving line of credit secured by the equity in your home. Equity is the difference between what your home is worth and what you owe on it: a home worth $400,000 with a $250,000 mortgage has $150,000 of equity. A lender approves a credit limit based on that equity, and you draw against it as needed — by cheque, by transfer, or with a HELOC-linked debit card — during a set period called the draw period. As you repay the principal, your available credit is restored and you can borrow again, just like a credit card.
The key difference from a home equity loan is flexibility. A home equity loan hands you a lump sum on day one and charges interest on the whole amount from the start, at a fixed rate, with fully amortising payments. A HELOC gives you a limit and charges interest only on the amount you actually draw, at a variable rate. If you are approved for $70,000 and draw $20,000 for a roof repair, you pay interest on $20,000 — not on $70,000. The unused $50,000 costs you nothing. Our guide to how a second mortgage works explains the other ways homeowners borrow against equity.
A HELOC is a second lien on your home. Your first mortgage stays completely untouched — same rate, same balance, same payment schedule. That is the main reason HELOCs surged in popularity in 2025 and 2026: millions of homeowners hold first mortgages below 5% and will not refinance into a 6% or 7% rate just to fund a renovation. A HELOC lets them borrow against the equity while keeping the cheap first mortgage intact. The trade-off is that your home is the collateral. If you cannot repay, the lender can foreclose — the same risk as any mortgage, applied to a flexible credit line.
How Does a HELOC Work? The Two Phases
Every HELOC has two distinct phases, and they have very different rules. The draw period is the stretch of time you can actually pull money from the line — 10 years is the industry standard, though some lenders offer 5-year draw periods and a few offer longer ones. During the draw period, you can borrow, repay, and borrow again, and the minimum payment is usually interest-only on the amount drawn. You can pay principal voluntarily, but you are not required to. Most HELOCs have a draw period of 5 to 10 years, according to the CFPB.
The repayment period begins when the draw period ends — typically 10 to 20 years. The line closes: no new draws are allowed, and the outstanding balance converts into a fully amortising loan that you repay with fixed principal-and-interest payments over the remaining term. This is where borrowers get caught out. The payment jump is called payment shock, and it can be large. On an $80,000 balance at 8.5%, the interest-only payment during the draw period is about $567 a month; the same balance amortised over 20 years costs about $694 a month. On a $50,000 balance at 8%, the interest-only payment is about $333 a month and the 20-year repayment is about $418 a month — and if the repayment period were only 10 years, it would be about $607 a month. The shorter the repayment period, the harder the shock.
The two phases add up to a total term of 25 to 30 years in most cases: 10 years of drawing plus 15 to 20 years of repaying. Before you sign, ask the lender for both numbers — the interest-only payment at your expected draw and the repayment-period payment on the same balance — and check that you can afford the second one, not just the first. A borrower who can only afford the interest-only payment is borrowing trouble on a ten-year timer. Our guide to interest rate calculators can help you test the payment at different rates.
How Much Can You Borrow?
Your credit limit depends on your equity, your credit, and your income. Most lenders cap the combined loan-to-value ratio — the first mortgage plus the HELOC, divided by the home’s value — at 80% to 85%. That cap sets the ceiling. On a $400,000 home at an 80% cap, total borrowing cannot exceed $320,000; with a $250,000 first mortgage, the maximum HELOC is $70,000. On a $500,000 home at an 85% cap, total borrowing can reach $425,000, so with a $300,000 mortgage the line could be $125,000. Some lenders go to 90% for strong borrowers, but 80% to 85% is the common range.
Typical qualification requirements are a credit score of 620 or higher, at least 15% to 20% equity remaining in the home after borrowing, and a debt-to-income ratio under 43%. Stronger credit earns a lower margin — the markup the lender adds to the prime rate — and a higher limit. The lender will order an appraisal or an automated valuation to confirm the home’s value, and will check your income and debts like any mortgage lender. Our guide to calculating your debt-to-income ratio explains the number the lender will check first.
Your limit can also change after closing. Most HELOC agreements let the lender reduce or freeze the line if the home’s value falls significantly, if your credit deteriorates, or if your financial circumstances change. A freeze is not a default and it does not demand immediate repayment, but it does cut off access to the money — sometimes exactly when a borrower needs it most, such as during a housing downturn. It is a real risk, and it is one reason a HELOC should not be your only emergency fund. Our guide to home loan calculators can help you work out how much equity you actually have to borrow against.
What Does a HELOC Cost?
Most HELOCs carry a variable interest rate, calculated as the prime rate plus a lender margin. The prime rate moves when the Federal Reserve acts: it was about 7.00% in late October 2026, according to Bankrate. The margin is typically 0.5 to 2 percentage points, depending on your credit and the lender. That puts the rate most borrowers actually pay in the region of 7.5% to 9% — national average HELOC rates in 2026 have ranged roughly from 7.1% to 8.6% across different surveys. Your rate can rise or fall over the life of the line, and your minimum payment moves with it.
The variable rate is the HELOC’s biggest cost risk. A borrower who draws $50,000 at 8% pays about $333 a month in interest-only payments; if the prime rate rises two points, the same draw at 10% costs about $417 a month — a 25% increase for the same borrowed amount. Some lenders offer a fixed-rate option on part of the balance, or let you lock a rate on a specific draw, but the standard HELOC floats. If you plan to carry a large balance for years, that uncertainty matters more than the starting rate. Compare the HELOC’s rate with a fixed-rate home equity loan before you choose, and ask whether the lender offers a rate cap and what it is.
Fees are usually modest. Many lenders charge no application fee, no annual fee, and no closing costs on a HELOC — they make their money on the interest. Some charge an appraisal fee, an annual fee of $50 to $100, or an early-termination fee if you close the line within two or three years. Ask for the full fee list in writing before you sign, and check whether there is a minimum draw requirement: some lenders require you to draw a minimum amount at closing, which means paying interest from day one on money you may not need yet. The CFPB requires lenders to give borrowers a disclosure booklet explaining HELOC terms before closing — read it, because it contains the exact rules for your line.
HELOC vs Home Equity Loan: Which Fits?
The choice depends on how you will use the money. A HELOC fits spending that is spread out or uncertain: a renovation done in stages, a series of college payments, or an ongoing project where you do not know the total cost in advance. You draw as the bills arrive, you pay interest only on what you have drawn, and you can repay and redraw if the project runs long. A home equity loan fits a single, known cost: a $40,000 kitchen, a $25,000 debt consolidation, a one-off expense where the amount is fixed. You get the lump sum, the fixed rate, and the certainty of a set monthly payment from day one.
The cost comparison turns on the rate and the timing. A HELOC’s starting rate is usually lower than a home equity loan’s fixed rate, because the lender is not locking in a rate for 15 years. But the HELOC’s rate can rise, while the loan’s cannot. On a balance you will repay within two or three years, the HELOC usually wins — the lower starting rate and the interest-only minimums keep the cost down. On a balance you will carry for ten years, the fixed loan often wins, because the certainty is worth the higher starting rate. Our guide to interest on loan calculators lets you compare the total interest on both options.
There is also a tax difference worth knowing, though it applies equally to both products. Under IRS rules, the interest on a home equity loan or a HELOC is deductible only if the money is used to buy, build, or substantially improve the home that secures the loan — and the deduction is subject to the $750,000 mortgage debt cap. Interest on money used for a holiday, a car, or paying off credit cards is not deductible. Keep records of what the money was spent on, because the deduction depends on the use, not on the product. Our guide to mortgage types compares the main ways homeowners borrow against their property.
The Risks Worth Knowing Before You Borrow
The first risk is the one already covered: payment shock when the draw period ends. Borrowers who pay interest-only for ten years and never touch the principal face a sudden jump to full principal-and-interest payments, on a balance that has not shrunk at all. The defence is simple and rarely followed: pay principal during the draw period, even though you are not required to. Every dollar of principal you repay during the draw period is a dollar you do not have to amortise later, and it also restores your available credit.
The second risk is the variable rate. A HELOC taken out when the prime rate is 7% can cost far more if the prime rate rises to 9% or 10%. Stress-test the line before you sign: can you afford the interest-only payment if the rate rises two points? Can you afford the repayment-period payment if the rate rises two points and the balance is still full? If either answer is no, borrow less or choose a fixed-rate product. Our guide to low-interest loans covers the cheaper alternatives worth checking first.
The third risk is the temptation the product creates. A HELOC turns your home equity into a credit card, and credit cards are easy to spend. Borrowers who draw for a renovation, then draw again for a car, then again for a holiday, can find that the equity built over a decade is gone in three years — and the home is still the collateral. The discipline that makes a HELOC safe is the same discipline that makes any credit safe: borrow for a specific purpose, with a specific repayment plan, and stop when the purpose is funded. Used that way, a HELOC is one of the cheapest forms of borrowing available to a homeowner. Used as a lifestyle fund, it is one of the fastest ways to lose a home.
Frequently Asked Questions
what is a heloc
A HELOC — a home equity line of credit — is a revolving credit line secured by your home. You are approved for a limit based on your equity, you draw only what you need during a draw period (typically 10 years), you pay interest only on what you have drawn, and you repay and redraw as needed. When the draw period ends, the line closes and you repay the balance over a repayment period of 10 to 20 years.
how long is the draw period on a heloc
Most HELOCs have a draw period of 5 to 10 years, with 10 years the most common, according to the CFPB. During that time you can borrow, repay, and borrow again, with interest-only minimum payments. After it ends, the repayment period — typically 10 to 20 years — begins, and you pay principal plus interest with no new draws allowed.
is heloc interest tax deductible
Only if the money is used to buy, build, or substantially improve the home that secures the line, under IRS rules — and the deduction is subject to the $750,000 mortgage debt cap. Interest on HELOC money spent on anything else, such as a holiday or paying off credit cards, is not deductible. Keep records of how the money was used.
what credit score do you need for a heloc
Most lenders require a credit score of 620 or higher, along with at least 15% to 20% equity remaining in the home after borrowing and a debt-to-income ratio under 43%. Stronger credit earns a lower margin over the prime rate and a higher credit limit. Lenders also verify income and order a valuation of the home.
what happens when the heloc draw period ends
The line closes and you enter the repayment period. You can no longer draw funds, and your outstanding balance converts to a fully amortising loan repaid with fixed principal-and-interest payments over 10 to 20 years. Your monthly payment rises — often substantially — because you start paying principal as well as interest. This jump is called payment shock, and it is the biggest surprise in HELOC borrowing.
The Bottom Line
A HELOC is a revolving credit line secured by your home: a limit based on your equity, interest only on what you draw, and the freedom to borrow, repay, and borrow again during a draw period of about 10 years. It is the cheapest way for most homeowners to fund a renovation without refinancing a low-rate first mortgage — but the rate is variable, tied to prime plus a margin, and the repayment period brings a payment jump that catches borrowers who paid interest-only for a decade. Before you sign, work out the maximum you can borrow at an 80% to 85% combined loan-to-value cap, stress-test the payment at a rate two points higher, and make a plan to pay principal during the draw period. Used for a specific purpose with a repayment plan, a HELOC is a sharp tool. Used as an open-ended fund, it puts the home at risk.