HELOC Explained: How a Home Equity Line of Credit Works

A HELOC (Home Equity Line of Credit) is a revolving line of credit secured by your home's equity. It works like a credit card — you borrow what you need, when you need it, during a draw period, then repay during a repayment period.

How a HELOC Works

• •Draw period (typically 10 years): You can borrow up to your credit limit. You usually pay interest only on what you borrow. Minimum monthly payments are small.
• •Repayment period (typically 10-20 years): You can no longer draw funds. You repay the balance with principal and interest over the remaining term.

How Much Can You Borrow?

Most lenders allow a combined loan-to-value (CLTV) of up to 85%:

HELOC Limit = (Home Value x 85%) - Current Mortgage Balance

Example: $500,000 home, $300,000 mortgage

• •Max combined: $500,000 x 85% = $425,000
• •HELOC limit: $425,000 - $300,000 = $125,000

Interest Rates

HELOCs have variable rates tied to the prime rate plus a margin. The rate can change monthly. Some lenders offer the option to convert a portion to a fixed rate.

When a HELOC Makes Sense

• •Home improvements — you draw funds as the project progresses
• •Emergency fund backup — available if needed, no cost until you draw
• •Education expenses — pay tuition over multiple semesters
• •Debt consolidation — lower rate than credit cards (but your home is at risk)

When a HELOC Does Not Make Sense

• •Large lump sum needed — a home equity loan or cash-out refinance may be better
• •You cannot handle variable payments — rate increases can raise your payment significantly
• •You are financially unstable — the HELOC is secured by your home

Risks

• •Foreclosure — failing to repay can cost you your home
• •Rate increases — variable rates can rise, increasing your payment
• •Payment shock — the shift from interest-only to full repayment can be dramatic
• •Over-borrowing — easy access can lead to spending more than planned

Key Takeaways

• •A HELOC is a revolving credit line secured by home equity
• •Draw period (10 years) with interest-only payments, then repayment period
• •Variable rate tied to the prime rate
• •Best for projects with phased spending or as an emergency backup
• •Your home is collateral — borrow responsibly
• •Use our HELOC Payment Calculator to estimate payments