On this page 9 sections
In short
- Limit: set from your home's value, minus what you owe, within the lender's maximum.
- Draws: borrow as needed during the draw period. Some programs fund the full line at closing instead.
- Rate: often variable, an index such as the prime rate plus a margin. Some programs offer fixed-rate options.
- Risk: your home is the collateral. If you can't repay, you could lose it.
How a HELOC works
A lender approves a credit limit based on your equity, credit and income. During the draw period you can borrow from the line, pay it down and borrow again. When the draw period ends, borrowing stops and you repay what you owe.
Three things set a HELOC apart from other loans:
- You pay interest on what you use. A $150,000 line with $20,000 drawn charges interest on $20,000. The exception is a program that funds the full line at closing.
- The rate usually moves. Many HELOCs are variable, so the payment can change. See how HELOC rates are set.
- The payment can change when the draw ends. Many plans allow interest-only payments while you draw, then require principal and interest. See draw vs. repayment period.
How much you can borrow
Lenders cap the total debt against your home at a percentage of its value, called the combined loan-to-value, or CLTV. Your current mortgage comes out of that total.
The maximum CLTV depends on the program, your credit and the property. Income and debts can lower the line further. Run your own numbers in the HELOC calculator, and see HELOC requirements for what lenders check.
What a HELOC costs
Interest is the main cost. On a variable HELOC the rate is an index, often the prime rate, plus a margin the lender sets when you open the line. The index moves with the market. The margin is set in your agreement and can change only as the agreement spells out in advance, such as losing a discount tied to automatic payments, or in the few other cases federal rules allow.
Fees vary by program. They can include an origination or application fee, appraisal and title costs, an annual fee and a fee for closing the line early. One detail catches people: the APR in a HELOC's disclosures doesn't include fees. Compare the fee list alongside the rate. More in how HELOC rates are set.
What federal rules require
Consumer HELOCs secured by a home come with specific rules under the Truth in Lending Act's Regulation Z. Business-purpose lines, including many on rentals you don't live in, generally fall outside these rules, so read those agreements closely.
- A public index. A variable rate can only move with an index that's publicly available and outside the lender's control.
- A lifetime cap. A variable-rate plan secured by your home must have a maximum rate. Your disclosures show it.
- Limits on freezing the line. The lender can stop new draws or lower the limit only in listed situations. They include a significant drop in your home's value, a material change in your finances that leads the lender to reasonably believe you can't repay, and a default on a material obligation in the agreement.
- Disclosures up front. When you apply, you get the length of the draw and repayment periods, how the minimum payment works, whether a balloon payment can result, and the CFPB booklet What You Should Know About Home Equity Lines of Credit.
- Time to cancel. On your principal residence you generally have three business days to cancel. See the right to cancel.
The risks
- Your home secures the line. If you can't repay, you could lose it.
- A variable rate can raise your payment, up to the cap in your agreement.
- The payment can jump when the draw period ends, especially after years of interest-only payments.
- The lender can freeze or lower the line in the situations above, so unused credit isn't a sure thing in a downturn.
- Selling the home generally means paying off the line.
- The lender can demand full repayment if you don't pay, misrepresent your finances or do something that harms the property's value.
HELOC vs. other ways to borrow against your home
| HELOC | Home equity loan | Cash-out refinance | |
|---|---|---|---|
| How you get the money | Draw as needed; some programs fund at closing | Lump sum at closing | Lump sum at closing |
| Rate | Often variable | Usually fixed | Fixed or adjustable |
| Interest charged on | What you've drawn | The full loan | The full new loan |
| Your first mortgage | Stays as is | Stays as is | Paid off and replaced |
Details in HELOC vs. home equity loan and HELOC vs. cash-out refinance.
When a HELOC fits
- Costs that arrive over time, like a renovation paid in stages.
- An amount you can't pin down yet.
- Borrowing you expect to repay fairly quickly.
- Keeping a low first-mortgage rate while you borrow against the equity.
Frequently asked questions
What is a HELOC in simple terms?
A line of credit secured by your house. You can borrow up to a set limit, repay and borrow again during the draw period, and you pay interest only on what you've borrowed.
Is a HELOC a second mortgage?
Usually. If you have a first mortgage, the HELOC is recorded behind it as a second lien. On a home with no mortgage, the HELOC can be the only lien on the property.
Do you pay interest on the whole HELOC limit?
Not on a standard HELOC. You pay interest on the balance you've drawn. Some programs fund the full line at closing, and then interest starts on the whole amount.
Can a lender freeze a HELOC?
Yes, but only in situations federal rules allow. They include a significant decline in the home's value, a material change in your finances that leads the lender to reasonably believe you can't repay, and a default on a material obligation in the agreement. If the reason goes away, the lender has to restore the line, though you may need to ask.
What happens to a HELOC when you sell your house?
The balance is generally paid off from the sale proceeds at closing, and the line is closed.
Questions about your own situation? Contact a licensed loan officer. It's optional, and your information is not sold to lead marketplaces.