What is a HELOC and How Does It Work?

A home equity line of credit (HELOC) is an open-end line of credit that lets you borrow repeatedly against the available equity in your home. Unlike a lump-sum home equity loan, a HELOC gives you a credit limit and lets you draw from the line during a defined borrowing period.

This article gives the practical overview. For a deeper explanation of the mechanics, see our How a HELOC Works guide.

What is a HELOC?

CFPB describes a HELOC as an “open-end” line of credit that allows repeated borrowing against home equity. If you already have a first mortgage, a HELOC is commonly a second mortgage or junior lien secured by the same property.

During the draw period, you can generally borrow up to the available credit limit, repay amounts and borrow again subject to the plan's terms. Interest is generally based on the outstanding amount borrowed rather than unused credit.

How home equity relates to a HELOC

Home equity is the difference between the property's current value and the amount owed on mortgages secured by it. For example, a home worth $400,000 with a $200,000 mortgage balance has $200,000 of equity before considering other liens.

That does not mean the homeowner can automatically obtain a $200,000 HELOC. The lender decides how much it is willing to lend after considering its product rules, the property's value, existing liens and the applicant's underwriting information.

Lenders may use combined loan-to-value (CLTV) when evaluating home-equity borrowing. There is no single universal maximum CLTV for every HELOC product, so check the lender's current criteria rather than assuming an 80% or 85% limit.

Draw period and repayment period

HELOCs commonly have two stages, although their length and payment rules depend on the plan.

CFPB gives a 10-year draw period as an example, not a universal term. After the draw period, a lender may provide a repayment schedule, often over a number of years. CFPB also notes that in some plans the entire amount may become due when repayment begins.

Do not assume every HELOC requires interest-only payments during the draw period. Minimum-payment formulas vary. CFPB warns that monthly payments are often significantly higher after the repayment period begins.

How HELOC interest rates work

HELOCs usually have variable interest rates. CFPB explains that a variable rate generally has two parts: an index and a margin. Common indexes can include the U.S. prime rate and the Constant Maturity Treasury rate; the lender's disclosures identify the index used by a particular plan.

The Federal Reserve's H.15 release publishes the Bank Prime Loan rate as a market benchmark. It is not an average HELOC rate and it is not necessarily the rate an individual borrower will receive.

For current benchmark context, see HELOC Rates & Prime Rate.

Fees and plan terms to check

HELOC costs vary. CFPB says some plans may charge application fees, origination or closing costs, appraisal or title costs, inactivity fees, annual or membership fees, early-cancellation fees and fixed-rate conversion fees.

Plans can also have transaction requirements, such as an initial advance, a minimum amount per draw or a minimum outstanding balance. Compare the complete disclosures rather than only an advertised APR.

Important HELOC risks

The biggest risk is straightforward: a HELOC is secured by your home. If you cannot repay the debt, foreclosure is possible.

Variable rates can change, payments may rise when repayment begins, and unused credit should not be treated as guaranteed cash. CFPB notes that a lender may restrict additional borrowing in qualifying circumstances, such as a significant decline in the home's value or certain changes in financial circumstances.

See our source-based guide to HELOC freezes and credit-limit reductions for the Regulation Z detail.

What lenders may consider

There is no universal HELOC approval formula. Lenders can consider credit information, income and debts, property value and existing liens, the requested line and other underwriting factors permitted by law. Product requirements differ.

That is why we do not use blanket rules such as “620 minimum credit score,” “43% maximum DTI” or “you must retain 20% equity” as though they apply to every HELOC.

See How to Qualify for a HELOC and What Credit Score Do You Need for a HELOC?.

HELOC vs home equity loan

Both use home equity as collateral, but their structures differ. CFPB describes a home equity loan as a specific amount borrowed against the home's equity, generally received as a lump sum. A HELOC is an open-end line that permits repeated draws up to the available limit during the borrowing period.

Neither structure is automatically the better choice. See our HELOC vs Home Equity Loan guide for the detailed comparison.

Sources & methodology

We use primary government sources for the mechanics and consumer protections on this page. Product-specific rates and underwriting rules should be verified with the lender.

• CFPB — What is a HELOC?
• CFPB — What You Should Know About Home Equity Lines of Credit
• CFPB — HELOC vs home equity loan
• CFPB — HELOC fees
• Federal Reserve — H.15 Selected Interest Rates

Frequently asked questions