The 30-second version
A HELOC is a credit line secured by your home. The lender approves you for a credit limit (typically up to 80-85% of your home's value, minus your existing mortgage). You can draw on the line as needed for 10 years (the "draw period"), paying interest only on what you've borrowed. After the draw period ends, you stop being able to borrow and start paying back the principal plus interest over 20 years (the "repayment period").
Why HELOCs exist
Most homeowners build substantial home equity over time — sometimes hundreds of thousands of dollars. That equity is real wealth, but it's locked up. To access it, your options are limited:
- Sell the home — gives you full access but you also lose the home and its tax basis
- Cash-out refinance — replaces your existing mortgage with a larger one and gives you the difference in cash. Means a new (often higher) interest rate on your whole loan balance.
- Home equity loan — second lien, fixed lump sum, fixed rate, fixed payment from day one
- HELOC — second lien, flexible credit line, variable rate, draw-as-needed
The HELOC fills a specific gap: you have equity, you might need to access some of it, but you don't know exactly how much or when. A renovation that might cost $40K but might cost $80K. A college tuition that arrives in chunks over four years. A small business that needs working capital occasionally. A medical situation that may or may not develop. These are all classic HELOC use cases.
The two phases of a HELOC
Phase 1: Draw period (years 1-10)
Your line is open. You can borrow up to your credit limit at any time. You're charged interest only on the amount you've actually drawn. If your line is $200K but you've drawn $50K, you pay interest on $50K.
Monthly payments during the draw period are typically interest-only, which keeps them low. With $50K outstanding at 8.5% APR, your monthly payment is roughly $354.
Some HELOCs allow you to make principal payments during the draw period, which reduces your balance and frees up your line for future borrowing. Most don't require it.
Phase 2: Repayment period (years 11-30)
The line closes to new draws. Your outstanding balance enters amortization — you start paying principal plus interest, and the loan must be fully paid off by the end of the repayment period (typically 20 years).
This is the moment many HELOC borrowers are surprised by. Your interest-only payment of $354 during the draw period suddenly jumps to a fully-amortizing payment of around $434 (on the same $50K balance at 8.5% over 20 years). For larger balances, the payment shock can be significant — borrowers who drew $150K and only paid interest may suddenly face a $1,300/month payment for the next 20 years.
Smart HELOC borrowers make principal payments during the draw period to soften this transition.
How interest rates work on a HELOC
Most HELOCs are variable-rate loans tied to the prime rate. Your APR is "prime + a margin" — for example, prime + 0.5%. As of April 2026, prime is 7.25%, so a HELOC at "prime + 0.5%" carries an 7.75% APR today. If the Fed raises rates and prime climbs to 8.0%, your HELOC APR climbs to 8.5%.
Some lenders offer fixed-rate HELOCs or fixed-rate conversion options — you can lock in your rate on some or all of the outstanding balance. These features are useful when rates are rising but typically come with slightly higher initial rates.
HELOC vs home equity loan: the key difference
People often confuse the two. The simplest distinction:
- HELOC = revolving credit line, variable rate, flexible draws. Think of it as a credit card backed by your house.
- Home equity loan (HELOAN) = one-time lump sum, fixed rate, fixed payment from day one. Think of it as a second mortgage with predictable monthly payments.
Use a HELOC when you don't know exactly how much you'll need, or when you want to draw over time. Use a home equity loan when you need a specific lump sum and want payment certainty.
Who qualifies for a HELOC in 2026?
- 15-20% home equity minimum (combined LTV under 80-85%)
- Credit score of 620 or higher (700+ for the best rates)
- Debt-to-income ratio under 43%
- Verifiable income (W-2, 1099, or self-employment with two years of returns)
- Primary residence in a state where the lender is licensed
The most common HELOC mistakes
- Treating it like free money. The line is there, but every dollar you draw is a dollar that earns interest. Borrow what you need, not what you can.
- Not paying down principal during the draw period. If you only pay interest for 10 years, your repayment period payment will shock you. Pay down at least some principal during the draw period if you can.
- Forgetting the rate is variable. If you're using the HELOC as a long-term funding source, model what happens if rates rise 2%. Many people who took out HELOCs at 4% in 2021 saw their rates climb above 8% by 2024.
- Using HELOC funds for non-deductible purposes. Interest is only tax-deductible if used to buy, build, or substantially improve the home. Using it for vacation or debt consolidation means no tax break.
The bottom line
A HELOC is the right tool when you have equity, need flexible access to some of it, and value the option to borrow without committing in advance. It's the wrong tool when you need a single large lump sum (use a home equity loan), when you're not sure you can manage variable payments, or when you'd just be using the line as easy money.
If you're considering one, the rate quote is free and takes 60 seconds. We'll tell you honestly whether the math works for your specific situation.
Find out what HELOC you'd qualify for
60-second rate check. No hard credit pull. Direct lender across 22 states.
Check My HELOC Rate