How a Home Equity Line of Credit Works

What Is a HELOC?

A home equity line of credit (HELOC) is a revolving line of credit secured by your home. Instead of receiving one lump sum, you may draw funds as needed up to an approved limit, and you generally pay interest only on the amount you actually use.

The Draw Period

During the draw period, you can borrow, repay, and borrow again up to your credit limit. Many programs allow interest-only or low minimum payments during this phase, depending on the lender’s terms.

The Repayment Period

When the draw period ends, you typically can no longer draw funds, and the balance is repaid over a set repayment period. Payments often increase at this point because they include principal as well as interest. Plan ahead for that change.

Variable Rates

Most HELOCs carry a variable interest rate tied to an index, such as the prime rate, plus a margin. When the index moves, your rate and payment can go up or down. Some lenders offer options to fix the rate on part of a balance; availability varies.

How a HELOC Works With Your First Mortgage

A HELOC is usually a second lien. Your existing first mortgage stays in place with its current rate and terms, and the HELOC is a separate account with its own payment. Because your home secures the line, missing payments could put your home at risk.

• Your first mortgage is not replaced or refinanced.
• The line and first mortgage together are limited by lender guidelines.
• Approval depends on credit, income, property value, and underwriting.

For more, see the CFPB’s homeownership resources.