In this guide
If you own a home and have been paying your mortgage for a few years, you may be sitting on a significant financial resource without even realising it — your home equity. A Home Equity Line of Credit (HELOC) is one of the most flexible ways to access that equity. In this guide, we explain exactly what a HELOC is, how it works, what it costs, and how to decide if it is right for your situation.
What is a HELOC?
A HELOC is a revolving line of credit secured against the equity in your home. Think of it like a credit card backed by your house — you are approved for a maximum credit limit, and you can draw from that limit whenever you need funds, repay it, and draw again during a set period.
Your home equity is the difference between what your home is currently worth and what you still owe on your mortgage. For example, if your home is worth $400,000 and you owe $200,000 on your mortgage, you have $200,000 in equity. Lenders typically allow you to borrow up to 80–90% of your home's value minus your existing mortgage balance.
Home value: $400,000 | Mortgage balance: $200,000 | Lender max LTV: 85%
Maximum HELOC: ($400,000 × 85%) − $200,000 = $140,000
How does a HELOC work?
A HELOC operates in two distinct phases: the draw period and the repayment period. Understanding both is essential before you apply.
During the draw period (typically 10 years), you can borrow from your credit line as needed. You might access funds via a debit card linked to the account, by writing a check, or through an online transfer. You only pay interest on the amount you actually borrow — not your full credit limit.
Once the draw period ends, you enter the repayment period (typically 10–20 years), during which you can no longer draw funds and must repay both principal and interest on the outstanding balance.
Draw period vs repayment period
| Feature | Draw Period | Repayment Period |
|---|---|---|
| Typical length | 5–10 years | 10–20 years |
| Can borrow funds? | Yes | No |
| Monthly payment | Interest only (usually) | Principal + interest |
| Payment amount | Lower | Higher |
Many first-time HELOC borrowers are caught off guard by the significant payment increase when the repayment period begins. Always plan your budget around the fully amortised repayment payment, not just the draw-period interest payment.
HELOC interest rates explained
Most HELOCs carry a variable interest rate tied to the Prime Rate (which moves with Federal Reserve policy). Your lender adds a margin on top of the Prime Rate to arrive at your rate. For example: Prime Rate (8.50%) + Margin (0.50%) = Your Rate (9.00%).
Because HELOC rates are variable, your monthly payment can go up or down over time. Some lenders offer a fixed-rate conversion option that lets you lock in a rate on all or part of your balance — worth asking about if you prefer payment predictability.
What affects your HELOC rate?
- Your credit score — higher scores get lower rates
- Your combined loan-to-value ratio (CLTV)
- The lender's margin above Prime
- Federal Reserve interest rate decisions
- The size of your credit line
HELOC pros and cons
Advantages
- Flexibility: Borrow only what you need, when you need it
- Lower initial payments: Interest-only during the draw period
- Potentially tax-deductible: Interest may be deductible if funds are used for home improvements (consult a tax advisor)
- Reusable credit: As you repay, you can draw again
- Lower rates than credit cards: Secured debt typically carries lower interest
Disadvantages
- Variable rate risk: Payments can increase if interest rates rise
- Your home is collateral: Defaulting puts your home at risk
- Payment shock: Payments jump significantly in the repayment period
- Lenders can freeze the line: If your home value drops or your credit deteriorates
- Fees: Application fees, annual fees, and closing costs may apply
Who qualifies for a HELOC?
Lender requirements vary, but most look for the following:
- Credit score: Minimum 620; 700+ for the best rates
- Home equity: Typically at least 15–20% equity remaining after the HELOC
- Debt-to-income ratio (DTI): Usually below 43–50%
- Stable income: Documented employment or self-employment income
- On-time payment history: Lenders look at your mortgage payment record
HELOC vs home equity loan — what is the difference?
A home equity loan gives you a lump sum of money upfront at a fixed interest rate, with fixed monthly payments over a set term. A HELOC gives you a revolving credit line with a variable rate. The right choice depends on how you plan to use the funds.
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| Disbursement | Draw as needed | Lump sum |
| Interest rate | Variable (usually) | Fixed |
| Best for | Ongoing or unknown costs | One-time large expense |
| Monthly payment | Varies | Fixed |
| Flexibility | High | Low |
Frequently asked questions
Can I get a HELOC on a rental or investment property?
Some lenders offer HELOCs on investment properties, but requirements are stricter and rates are typically higher than for primary residences.
How long does HELOC approval take?
The process typically takes two to six weeks, including application, appraisal, underwriting, and closing.
Can I pay off a HELOC early?
Yes, though some lenders charge an early closure fee (typically if you close the line within two to three years). Check your loan agreement before prepaying.
What happens to my HELOC if I sell my home?
When you sell, the HELOC balance is paid off at closing from the sale proceeds, just like your primary mortgage.