Home Equity Line of Credit (HELOC)
A HELOC is a revolving credit line secured by your home’s equity. Learn how draws, repayments, and variable rates work with HELOCs.
Definition
A home equity line of credit (HELOC) is a revolving line of credit secured by the equity in your home. Like a credit card, a HELOC allows you to borrow up to a preapproved limit during a draw period, usually 5 to 10 years, and repay funds during a repayment period, often 10 to 20 years. Borrowers can repeatedly draw, repay, and redraw funds up to the limit, paying interest only on the outstanding balance. Most HELOCs carry variable interest rates tied to an index plus a margin, so payments can fluctuate over time. HELOCs are used for home improvements, debt consolidation, education expenses, or emergency funds.
Why It Matters
Two things separate a HELOC from a credit card: the collateral is your house, and the payment structure changes on a date buried in the paperwork. When the draw period ends, interest-only converts to principal and interest, and a $75,000 balance can jump from $430 a month to $790. Lenders can also freeze or cut the line if local values fall, usually right when you were counting on it.
Examples
A homeowner opens a $120,000 line at prime plus 0.5%, draws $40,000 for a kitchen, and watches the payment move with every rate change.
In year 10 the draw period closes on a $95,000 balance, the loan amortizes over the next 15 years, and the payment climbs $360.
A borrower who used draws for a rental down payment finds the remaining $60,000 of the line frozen after a countywide value decline.
Tips
Get the index and the lifetime rate cap in writing. Most HELOCs are prime-based with caps near 18%, and that ceiling is your actual worst case.
Ask about early closure fees. Many lenders claw back waived closing costs if you close the line within 24 to 36 months.
Keep contractor invoices if you draw for improvements. HELOC interest is deductible only when the money buys, builds, or substantially improves the home securing the line.
Related Terms
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