What Is a HELOC and How Does a Home Equity Line of Credit Work?

A home equity line of credit, or HELOC, is a revolving line of credit secured by the equity a homeowner has built up in their property, generally the difference between the home's value and what is still owed on the mortgage. Unlike a home equity loan, which provides a single lump sum with a fixed rate and fixed repayment schedule, a HELOC works more like a credit card: borrowers can draw funds as needed up to an approved limit, repay some or all of the balance, and borrow again during a set draw period. A HELOC also differs from a cash-out refinance, which replaces the existing mortgage entirely rather than adding a separate credit line on top of it.

Lenders typically set a HELOC's credit limit using a loan-to-value calculation comparing the home's appraised value with the combined balance of the existing mortgage and the new credit line, often allowing homeowners to borrow up to 80 to 85 percent of their equity depending on credit history and income. A HELOC has two phases: a draw period, often around 10 years, during which the borrower can access funds and typically makes interest-only or minimum payments, and a repayment period, often 10 to 20 years, during which no further draws are allowed and both principal and interest come due. HELOCs are commonly used for home improvements, debt consolidation, or major expenses.

Most HELOCs carry a variable interest rate tied to a benchmark index, so monthly payments can rise or fall over the life of the loan as that index moves, adding a degree of uncertainty compared with a fixed-rate loan. Because a HELOC is secured by the home, the property serves as collateral, and a borrower who falls behind on payments risks foreclosure just as with a primary mortgage. Prospective borrowers are generally encouraged to understand the draw and repayment schedule, how rate changes could affect future payments, and their ability to repay before opening a line of credit against their home.