On this page
- How a home equity line of credit works
- How much can you borrow with a home equity line of credit?
- HELOC rates and payments
- HELOC requirements and how to apply
- Home equity line of credit costs and risks
- Is a home equity line of credit a good idea?
- Alternatives to a HELOC
- Home equity line of credit FAQ
- Next steps
A home equity line of credit (HELOC) is a revolving line of credit secured by your home. You can borrow up to a set limit, repay and borrow again during a draw period, usually at a variable rate. Because your house is the collateral, you could lose it if you can’t repay.
Below, see how a HELOC works, how lenders set your limit, how the payment can change and when a HELOC fits your plan.
How a home equity line of credit works
A HELOC has two phases: a draw period, when you can borrow, and a repayment period, when you pay the balance down. The Consumer Financial Protection Bureau (CFPB) describes it as a loan “that allows you to borrow, spend, and repay as you go, using your home as collateral.”
The draw period
During the draw period, you can borrow up to your credit limit whenever you want. The CFPB uses 10 years as an example length, but your agreement sets the actual term. Lenders typically give you special checks or a credit card to draw on the line.
Some plans also require a minimum draw each time (the CFPB’s example is $300), a minimum balance, or an initial draw when the line opens.
You pay interest only on the amount you have drawn. Some plans allow interest-only payments during the draw period, while others set a minimum payment that includes some principal.
The repayment period
When the draw period ends, you can no longer borrow. The lender may then set a schedule to repay the full balance, often over 10 to 20 years, according to the CFPB. As a result, monthly payments are often much higher once repayment starts.
Some plans instead require the whole balance at once, which is called a balloon payment. In that case you would need savings or a new loan to pay it off. For your options at that point, see what to do when your HELOC comes due.
The variable rate
Most HELOCs have a variable rate tied to an index. So when the index rises, your rate and payment rise too, even if you don’t borrow more. Some lenders also let you convert part of the balance to a fixed rate. That fixed rate is typically higher than the variable rate, the CFPB notes, but the payment is predictable.
How much can you borrow with a home equity line of credit?
Lenders set your credit limit from your home’s value and what you owe on it. Lenders generally cap the line with a maximum combined loan-to-value ratio (CLTV). CLTV is the total of all loans secured by the home divided by the home’s value.
Each lender sets its own CLTV limit, and it can vary with your credit score, the property type and the size of the line. Say a homeowner has a $400,000 home, owes $250,000 on the first mortgage, and applies with a lender whose limit is 85% CLTV.
| Step | Amount |
|---|---|
| Home value | $400,000 |
| Example CLTV limit (lenders set their own) | 85% |
| Maximum total debt on the home ($400,000 × 85%) | $340,000 |
| Minus first mortgage balance | $250,000 |
| Maximum HELOC line | $90,000 |
The 85% figure is an illustration only. Your line could also come in lower if your income or credit doesn’t support the payment on the full amount.
A HELOC also affects your next refinance of the first mortgage. For example, Fannie Mae counts “the full amount of any HELOCs (whether or not funds have been drawn)” in the home equity combined loan-to-value ratio (HCLTV). Learn more about how your refinance depends on HTLTV and HCLTV.
HELOC rates and payments
A HELOC rate generally has two parts, the CFPB explains: an index and a margin. The index is a published rate that moves with the economy. The margin is the extra percentage the lender adds to the index.
The prime rate and your margin
Common indexes include the U.S. prime rate and the Constant Maturity Treasury rate. The bank prime loan rate was 7.00% on November 9, 2026, according to the Federal Reserve H.15 bank prime loan rate (via FRED). So a line priced at prime plus 1 percentage point would have carried an 8.00% rate that day.
Your margin depends on the lender, your credit and your CLTV. When two offers use the same index, the margin is the part to compare. Under Regulation Z, a lender generally can change your HELOC rate only by following an index that it doesn’t control and that the public can see.
Intro rates and rate caps
Some lenders offer an introductory or “teaser” rate that is unusually low for a short period. The CFPB’s example is six months. After that, the rate resets to the index plus the margin, so check the fully indexed rate before you sign.
Federal law requires every variable-rate HELOC to state the maximum rate the lender can charge during the plan (12 CFR 1026.30). The lender’s disclosures must also list any annual or more frequent limits on rate changes, or say that no annual limit exists. Some plans also set a rate floor, a minimum rate that applies even if the index falls.
HELOC payment example: draw period vs. repayment period
Say a borrower draws $30,000 and keeps that balance through the draw period. This example uses a rate of 8.00% for the whole period. It is an example rate, not today’s HELOC rate. The payments below cover the HELOC only, with no property taxes, homeowners insurance or first mortgage payment included.
| Phase | How the payment works | Monthly payment |
|---|---|---|
| Draw period | Interest only on $30,000 at 8.00% | $200.00 |
| Repayment period | $30,000 at 8.00%, paid off over 20 years | $250.93 |
In this example the payment rises by about $51 a month, roughly 25%, on the same balance at the same rate. The jump is larger when the balance is higher or the rate has risen. Each 1 percentage point rate increase also adds $25 a month to the interest-only payment on $30,000.
HELOC requirements and how to apply
HELOC requirements vary by lender, and each lender sets its own credit and debt limits. Still, lenders generally review similar items.
What lenders look at
- Credit: Lenders often price the line by credit score, and each sets its own minimum. A higher score can mean a lower margin or a higher CLTV limit.
- Debt-to-income ratio (DTI): This compares your monthly debt payments, including the new HELOC payment, with your gross monthly income. Each lender sets its own maximum.
- Equity: The line has to fit under the lender’s CLTV limit, as in the example above.
- Home value: Some lenders order a full appraisal. Others accept an automated valuation model or a drive-by inspection, depending on the line size and their policy.
- Documents: Lenders often ask for pay stubs, W-2s or tax returns, a current mortgage statement, proof of homeowners insurance and a photo ID.
Steps to get a HELOC
- Check your credit reports and estimate your CLTV with a recent value and your loan balance.
- Get offers from several lenders, such as banks and credit unions.
- Compare the APR, the margin, the index, the rate caps and floor, the draw and repayment periods, and every fee.
- Apply, provide documents and allow time for the home valuation.
- Close, then wait out the right-to-cancel period before you draw.
The CFPB booklet includes a “Get three HELOC estimates” worksheet for this comparison. It also lists fees borrowers tend to miss, such as annual, inactivity and early termination fees.
Regulation Z adds two protections. A lender generally can’t charge a nonrefundable fee until three business days after you receive the HELOC disclosures. In addition, you can cancel a HELOC on your principal residence until midnight of the third business day after you open it or receive the cancellation notice and required disclosures, whichever is last (12 CFR 1026.15). For this rule, Saturdays count and Sundays and federal holidays do not.
Home equity line of credit costs and risks
A home equity line of credit can cost less than an unsecured loan, but it carries risks that a credit card does not.
Fees. Some lenders waive some or all up-front costs, while others charge them. The CFPB lists appraisal fees, application fees, and closing costs such as attorney, title search and mortgage preparation and filing fees. Ongoing costs can include an annual fee, transaction fees and an inactivity fee. Some lenders also charge an early termination fee, so ask whether one applies if you close the line early.
Rate changes and payment shock. Your payment can rise during the draw period because the rate moves with the index. It can then jump again when the draw period ends and principal payments begin, as the example above shows. Plan your budget around the repayment-period payment, not the interest-only one.
Frozen lines and foreclosure risk
Regulation Z lets a lender block new draws or reduce your limit in certain cases. These include a significant drop in your home’s value or a material change in your finances that leads the lender to believe you can’t repay (12 CFR 1026.40(f)(3)(vi)). The lender must send written notice with specific reasons no later than three business days after it acts (12 CFR 1026.9(c)(1)(iii)).
However, a lender can’t simply call the whole balance due early. That is allowed only in narrow cases, such as fraud, missed payments, or an action that harms the lender’s security in the home. So treat the unused part of a line as available credit you may lose, and don’t count it as an emergency fund.
Your home also secures the line. If you fall behind or can’t repay on schedule, the CFPB warns, “you could lose your home.”
Before you apply, compare what each lender would offer on your home and credit.
Is a home equity line of credit a good idea?
A home equity line of credit tends to fit costs that come in stages or that you can’t price up front. It fits less well when you need one fixed sum or a payment that never changes.
Good uses include:
- Home improvements paid over time: You draw as each contractor bill comes due and pay interest only on what you’ve used.
- A backup for large, uneven expenses: Examples include tuition paid each term or medical bills, as long as you have a repayment plan.
- Paying off higher-rate debt: This works only if you stop adding new balances. See how to use home equity to pay off debt.
Poor uses include:
- Vacations, cars or everyday spending that would outlast the debt.
- Investments where a loss would leave you with the debt but no gain.
- Any plan that relies on the rate staying low or the draw period lasting forever.
HELOC interest and your taxes
Interest on a home equity line of credit is deductible only when you use the money to buy, build or substantially improve the home that secures the line. This rule appears in IRS Publication 936 (2025 edition). You must also itemize, and the loan counts toward the overall $750,000 limit on home acquisition debt for loans taken out after December 15, 2017 ($375,000 if married filing separately).
The 2025 tax law (Public Law 119-21, section 70108) made both limits permanent. As a result, interest on HELOC money spent on a car or credit cards isn’t deductible as home mortgage interest. Ask a tax professional how the rules apply to your return.
Alternatives to a HELOC
A HELOC is one of several ways to borrow against your home. Each option below has its own guide.
- Home equity loan: You get one lump sum at a fixed rate and pay it off in equal payments. Compare the two in HELOC vs home equity loan, or read about home equity loan rates and requirements.
- Cash-out refinance: This replaces your first mortgage with a larger one. It can make sense if your current rate is higher than the rate you could get now. See cash-out refinance vs HELOC.
- Home equity agreement: An investor gives you cash now for a share of your home’s future value, typically with no monthly payment. See home equity agreement vs HELOC.
- Personal line of credit: This option doesn’t put your home at risk, but the rate is typically higher than on a loan secured by your home, the CFPB notes.
Home equity line of credit FAQ
How does a home equity line of credit work?
A lender approves a credit limit based on your equity, income and credit. You then borrow as needed during the draw period and pay interest on what you use. After that, you repay the balance during the repayment period, or all at once if the plan has a balloon payment.
What credit score do you need for a HELOC?
Each lender sets its own minimum credit score for a HELOC. A higher score can also qualify you for a lower margin or a higher CLTV limit. Ask each lender for its minimum before you apply.
Can a lender freeze my home equity line of credit?
Yes, in specific cases. Under Regulation Z, a lender can stop new draws or lower your limit if your home’s value drops significantly, your finances change materially, or you default. The lender must give you written notice with its reasons no later than three business days after it acts.
Is HELOC interest tax deductible?
It is deductible as home mortgage interest only if you use the money to buy, build or substantially improve the home that secures the line, and you itemize. IRS Publication 936 (2025) explains the rule, and the 2025 tax law made it permanent.
Can I pay off a home equity line of credit early?
Usually, yes. You can pay down the balance during the draw period and borrow it again. However, some lenders charge an early termination fee, so ask whether one applies if you close the line early.
Next steps
A HELOC works best when you have solid equity, a steady income and a plan to repay before the draw period ends. Start by estimating your CLTV with the example above. Then get written offers from at least three lenders and compare the margin, rate caps, fees and repayment terms side by side using the CFPB HELOC booklet.
