What a HELOC is
A HELOC is an "open-end" line of credit that lets you borrow repeatedly against your home equity.[1] The CFPB's brochure describes it as a loan that allows you to borrow, spend and repay as you go, using your home as collateral.[2] Your equity is the home's market value minus what you owe on it; the lender turns part of that equity into a credit limit, and you draw on it only when you need money.
That makes a HELOC different from a lump-sum loan. You pay interest only on what you have actually drawn, not on the full limit, and repaying principal frees up room to borrow again during the draw period. Households owed $481 billion on these lines in September 2026, after a $23 billion rise in one quarter, the largest since 2005.[8]
How does a HELOC work, step by step
A HELOC works in two phases after you open it: a draw period, when you can borrow, then a repayment period, when you pay the balance off.
- Apply and get a limit. The lender checks your credit and income and values the home. The limit is generally a percentage of the appraised value minus what you owe on the mortgage.[2] See how much you can borrow.
- Review the disclosures. Before the plan opens, the lender must give you the HELOC brochure and disclosures covering the rate, fees, the draw and repayment periods and how the minimum payment is figured.[5]
- Three days to cancel. If the line is secured by your principal dwelling you can cancel within three business days after opening.[4] The lender must then release its claim on the home and return the fees you paid, including application and appraisal fees.[3]
- Draw. You borrow up to the limit whenever you want, typically with special checks, and some plans offer a card. Some require a minimum draw, such as $300, or a minimum balance.[3]
- Pay during the draw. Many plans ask only for interest during the draw period, which means paying nothing toward principal.[2]
- Repay. When the draw period ends you can no longer borrow. The balance is repaid over a set period, often ten or 15 years in the CFPB's description, or on some plans it is due all at once as a balloon payment.[2] The HELOC payoff page covers this stage.
Example
Try it: a HELOC from draw to payoff
Interest-only draw, then principal and interest
| Rate (prime + margin) | 8.00% |
|---|---|
| Balance at the end of the draw | $25,000 |
| Interest during the draw | $20,000 |
| Interest during repayment | $18,004 |
| Total interest | $38,004 |
| Rate | Draw payment | Repayment payment | Total interest |
|---|---|---|---|
| 7.00% | $146 | $225 | $32,947 |
| 8.00% | $167 | $239 | $38,004 |
| 9.00% | $188 | $254 | $43,142 |
| 10.00% | $208 | $269 | $48,357 |
| 11.00% | $229 | $284 | $53,647 |
- Mortgage $200,000
- HELOC drawn $25,000
- Equity left $125,000
At 10.00% (your stress test) the repayment payment would be $268.65. A HELOC rate follows its index, so plan for the payment in the stressed row, not only today's.
| Year | Monthly payment | Interest | Principal | Balance at year end |
|---|---|---|---|---|
| 1 · draw | $167 | $2,000 | $0 | $25,000 |
| 5 · draw | $167 | $2,000 | $0 | $25,000 |
| 10 · draw | $167 | $2,000 | $0 | $25,000 |
| 11 | $239 | $1,967 | $899 | $24,101 |
| 15 | $239 | $1,630 | $1,237 | $19,692 |
| 20 | $239 | $1,023 | $1,843 | $11,783 |
| 25 | $239 | $120 | $2,746 | $0 |
How it is calculated. Rate = prime + margin. Draw period: balance × rate ÷ 12 each month (interest only). Repayment: the level payment that repays the balance over the repayment period. Maximum line shown at an 85% combined loan-to-value limit.
The HELOC interest rate
Most HELOCs have a variable rate made of two parts: an index and a margin. Common indexes include the U.S. prime rate and the Constant Maturity Treasury rate, and the margin is an extra percentage the lender adds.[2] The prime rate stood at 7.00% on November 12, 2026.[6] With a 1-point margin the example line costs 8.00%; if prime rises, so does your rate. Some lenders open with a teaser rate that is unusually low for a short period, such as six months, so ask what the rate will be after it ends.[2]
| Monthly payment | Length | Interest | |
|---|---|---|---|
| Draw period (interest only) | $166.67 | 10 years | $20,000 |
| Repayment period | $238.91 | 15 years | $18,004 |
| Whole life of the line | 25 years | $38,004 |
What a HELOC costs to open and keep
Setting up a HELOC costs much like getting a mortgage: an appraisal fee, an application fee that may not be refunded, up-front charges such as points, and closing costs such as title search and recording. During the plan there can also be annual membership or maintenance fees and a fee each time you draw.[3] A HELOC's APR is based on the interest rate alone and does not include those charges, so compare fees separately when you shop.[3]
HELOC vs. other ways to borrow
| HELOC | Home equity loan | Credit card | |
|---|---|---|---|
| Money paid out | As you draw | Lump sum at closing | As you charge |
| Rate | Usually variable | Usually fixed | Usually variable |
| Secured by your home | Yes | Yes | No |
| Payments | Often interest-only, then amortizing | Equal payments to payoff | Minimum payment |
Because your home lowers the lender's risk, HELOC rates are generally lower than rates on other types of credit,[3] but the stakes are higher. For a one-time expense with a known price, a fixed-rate loan may fit better; see the home equity loan vs. HELOC comparison and the HELOC pros and cons.
Risks to understand
- Your house is the collateral. If you cannot repay, you could lose your home.[2]
- The line can shrink. A lender may freeze or reduce the line if the home's value declines significantly or your finances change materially.[5]
- Payments rise. Variable rates and the end of the draw period can both raise the payment.
- Tax treatment depends on use. Interest is deductible only if the money is used to buy, build or substantially improve the home that secures the line.[7] See is HELOC interest tax deductible.
Run your own numbersThe HELOC payment calculator has the full set of inputs, including your lender's CLTV limit, a principal-and-interest draw option and a rate stress test.
Frequently asked questions
What is a HELOC in simple terms?
A credit line secured by your home. You can borrow up to a limit, repay and borrow again during the draw period, then repay what you owe over the repayment period.
How does a HELOC work when you buy a house?
A HELOC is usually opened after you own a home and have built equity. Some buyers open one alongside a first mortgage to cover part of the price; the combined loan-to-value of both loans still has to fit the lender's limits.
Do you pay interest on the whole HELOC limit?
No. Interest is charged on the balance you have drawn, not on the unused part of the line. Some plans charge an annual fee whether or not you use the line.
How long does a HELOC last?
As long as its draw period plus repayment period. The CFPB's booklet gives 10 years as an example of a draw period.[3] The example on this page uses 10 years of draw and 15 of repayment.
Sources
- What is a home equity line of credit (HELOC)?
- What You Should Know About Home Equity Lines of Credit (HELOC)
- What you should know about home equity lines of credit (booklet)
- Regulation Z § 1026.15, Right of rescission (open-end credit)
- Regulation Z § 1026.40, Requirements for home equity plans
- H.15 Selected Interest Rates (bank prime loan rate)
- Publication 936 (2025), Home Mortgage Interest Deduction
- Quarterly Report on Household Debt and Credit, 2026:Q3