What Is a HELOC? How Home Equity Lines of Credit Work

If you own a home, you may be sitting on a significant financial resource: your home equity. A HELOC — Home Equity Line of Credit — lets you tap into that equity for major expenses. But it's not free money. Here's how it really works.

What Is Home Equity?

Home equity is the difference between your home's current market value and what you still owe on your mortgage. If your home is worth $400,000 and you owe $250,000, you have $150,000 in equity. A HELOC typically lets you borrow up to 85% of your home's value minus what you owe.

Example: Home value $400,000 × 85% = $340,000. Minus $250,000 mortgage = $90,000 maximum HELOC.

How a HELOC Works

A HELOC works like a credit card secured by your home. You get a credit limit and a draw period — typically 10 years — during which you can borrow, repay, and borrow again. You only pay interest on what you actually use. After the draw period, you enter the repayment period (typically 20 years), when you can no longer borrow and must repay what you owe.

• Draw period: 5–10 years (borrow and repay freely)
• Repayment period: 10–20 years (pay back the balance)
• Variable interest rate (tied to prime rate)
• Interest-only payments during draw period are common

HELOC vs Home Equity Loan

A home equity loan gives you a lump sum at a fixed interest rate — like a second mortgage. A HELOC is revolving credit with a variable rate. HELOCs are more flexible; home equity loans are more predictable. If you need a specific amount for one project (like a roof replacement), a home equity loan may be better. For ongoing expenses or unpredictable costs, a HELOC is more practical.

When a HELOC Makes Sense

• Home renovations that increase property value
• Consolidating high-interest debt (HELOC rates are much lower than credit cards)
• Emergency fund backup (keep the line open, only use if needed)
• Education expenses
• Medical bills

The Risks of a HELOC

The biggest risk: your home is the collateral. If you can't repay, the lender can foreclose. Variable interest rates mean your payment can rise significantly if rates go up. And it's easy to overextend — a HELOC can become a trap if used for non-essential spending.

How to Get a HELOC

• Minimum 620 credit score (720+ for best rates)
• At least 15–20% equity in your home
• Stable income and low DTI ratio
• Compare offers from multiple lenders — rates and fees vary significantly