A home equity line of credit, or HELOC, is a revolving credit line secured by your home, usually as a second lien that sits behind your first mortgage. During the draw period you can borrow against your equity, repay, and borrow again up to your limit, and you pay interest only on what you actually draw. When the draw period ends, the line closes to new borrowing and you repay whatever you owe in installments.
What Is a Home Equity Line of Credit?
A HELOC is a credit limit attached to your house. The lender looks at your home's value, subtracts what you already owe against it, and approves a line you can tap when you choose. It works less like a mortgage and more like a credit card, except your home secures the debt, which is exactly why the pricing is lower than unsecured borrowing and why the stakes are higher if you fall behind.
Three features define it:
- It is revolving. You are approved once for a limit, then borrow and repay on your own schedule during the draw window. Paying the balance down restores your available credit.
- It is usually a second lien. Your first mortgage stays exactly as it is. The HELOC records behind it, which is why lenders care about the combined total of both debts against your value.
- The pricing is usually variable. Most lines are tied to an index plus a margin, so the cost of carrying a balance can move up or down over time. Some lenders offer fixed-rate conversion options on drawn balances, but the base line is typically variable.
How Does a HELOC Work?
A HELOC has two phases, and understanding the boundary between them is most of understanding the product.
The draw period comes first. The line is open, you can borrow up to your limit, and required payments are small, often covering only the interest on what you have drawn. You access the money by transfer, card, or checks tied to the line, depending on the lender.
The repayment period comes second. The line closes to new borrowing, and your payments convert to principal and interest on whatever balance remains. That structural shift is where borrowers get surprised, because the required payment can jump substantially even though nothing about the debt itself changed.
The CFPB's guide to home equity lines is a solid neutral reference on these mechanics if you want a second source.
How Does the HELOC Draw Period Work?
During the draw period, the line behaves like a flexible pool of money. A homeowner renovating in phases might draw for the roof in March, repay some of it by summer, then draw again for the kitchen in the fall. Interest accrues only on the outstanding balance, never on the unused limit.
The convenience hides two habits worth building early:
- Pay more than the minimum. Interest-only payments feel light, but they do not shrink the debt. A balance you carry casually through the whole draw window arrives at the repayment phase fully intact.
- Track the index. Because most lines are variable, the carrying cost changes with the market. Your agreement spells out the index, the margin, how often the pricing adjusts, and the caps that limit how far it can move. Read those terms before you sign, not after.
What Happens When the HELOC Draw Period Ends?
Three things happen at the end of the draw window. The line freezes, so you cannot borrow more. The payment recalculates to retire the balance over the remaining term, principal included. And your options narrow, because whatever balance is left is now a fixed obligation on your house.
Homeowners in that position typically choose among four paths: pay the balance down aggressively, ride out the repayment schedule, ask the lender about renewing or replacing the line, or roll the balance into a new first mortgage through a refinance. Which path wins depends on the size of the balance, what your first mortgage looks like, and where your equity stands. That last piece is worth checking first, and how home equity is calculated walks through the exact math.
How Much Can You Borrow With a HELOC?
Lenders size a HELOC using combined loan-to-value, or CLTV: your first mortgage balance plus the new line, measured against your home's value. Many lenders allow a combined total up to about 85 percent of value, and plenty cap it lower at 80 percent.
Here is the arithmetic on a home worth $425,000 with a $260,000 first mortgage:
| Step | At an 85% CLTV cap | At an 80% CLTV cap |
|---|---|---|
| Maximum combined debt allowed | $361,250 | $340,000 |
| Minus the first mortgage balance | $260,000 | $260,000 |
| Largest possible line | $101,250 | $80,000 |
Two things about that table. First, the cap applies to the limit, not to what you must borrow, so you can take a smaller line than the maximum. Second, your actual approval also depends on your credit profile, your income, and the lender's appetite, so treat the CLTV math as the ceiling, not a promise.
What Do You Need to Qualify for a HELOC?
Qualification looks a lot like qualifying for a mortgage, because that is what a HELOC is: a mortgage in line-of-credit form. Lenders generally want to see:
- Meaningful equity. The CLTV math above has to leave room for a line worth opening.
- A solid credit history. The line is secured, but the lender still prices and approves based on how you have handled debt.
- Documented income. You will verify employment and income much as you would for a refinance, because the lender needs confidence you can carry both the first mortgage and the line.
- An acceptable property. Expect some form of valuation, from an automated estimate to a full appraisal, and expect owner-occupied homes to get the friendliest terms.
How Does a HELOC Affect Refinancing Your Mortgage Later?
This is the part I wish more homeowners thought about on day one. An open HELOC sits on your title, and a new first mortgage cannot record ahead of it without dealing with it. At refinance time that means one of two things: the line gets paid off and closed through the new loan, or the HELOC lender agrees to subordinate, formally accepting second position behind your new first mortgage. Subordination is common but not automatic, and it adds time and paperwork to the process.
The line also changes your refinance math. Lenders count the HELOC in your combined loan-to-value even if the balance is zero, and a drawn balance raises the total debt your equity has to support. If the endgame is consolidating everything into one loan, a cash-out refinance sized to retire the line is the standard route, and you can check refinance pricing in about 30 seconds to see what that consolidation would look like.
Should You Get a HELOC or Refinance Instead?
The short version: a HELOC tends to fit when your first mortgage is worth keeping and your cash need is flexible or spread over time, while a refinance tends to fit when the first mortgage itself needs restructuring or the cash need is large and immediate. The full comparison, including a home equity loan as the third option, lives in my guide to cash-out refinance vs. HELOC vs. home equity loan, and I would rather you read that than guess.
Whichever direction you lean, start with your equity position, because it sets the boundaries for every option on the table.
FAQ
Do you pay interest on the whole HELOC or only what you draw?
Only on what you draw. A HELOC is a credit limit, not a loan balance, so the untouched portion of the line accrues no interest. Watch the fee schedule, though. Some lenders charge annual fees or inactivity fees even when the balance is zero.
Can you pay off a HELOC early?
Yes. The line is revolving, so you can repay part or all of the balance at any time during the draw period and borrow again if you need to. Closing the line entirely is also allowed, but some lenders charge an early closure fee if you cancel within the first few years, so read the agreement before you zero it out and close it.
Does opening a HELOC hurt your credit score?
Usually a little, and usually temporarily. The lender pulls your credit, which is a hard inquiry, and the new account lowers your average account age. How the drawn balance affects your score after that varies by scoring model. Making the payments on time matters far more over the long run.
Is HELOC interest tax deductible?
Only in limited cases. Under current IRS rules in Publication 936, interest on a home equity line is deductible only when the borrowed money buys, builds, or substantially improves the home that secures the line, and only if you itemize. My post on whether home equity borrowing is tax deductible covers the details. This is educational information, not tax advice. Confirm your situation with a tax professional.
Rate quotes are estimates based on verified borrower, property, and market details. Actual terms may differ.