What is a HELOC and how does it work?

A home equity line of credit (HELOC) lets you borrow against the equity in your home — the value of your home minus what you still owe on your mortgage. The Consumer Financial Protection Bureau describes it as an “open-end” line of credit you can borrow against repeatedly, and the Federal Reserve calls it “a form of revolving credit in which your home serves as collateral.”

In other words, it works a bit like a credit card secured by your house: you’re approved for a maximum amount, you draw what you need, and as you repay, your available credit is replenished.

HELOC vs. home equity loan vs. cash-out refinance

These three are easy to confuse:

• HELOC — a revolving line of credit (draw as needed) at a typically variable rate. It sits behind your existing mortgage as a second lien.
• Home equity loan — a one-time lump sum at a fixed (or adjustable) rate. Also a second lien.
• Cash-out refinance — replaces your existing mortgage with a new, larger loan and pays you the difference in cash. It’s one new first-lien loan, not a second one.

Which fits depends on whether you want ongoing access, a fixed payment, or to reset your first mortgage.

The two phases: draw period and repayment period

A HELOC has two stages:

1. Draw period — often around 10 years, when you can borrow up to your limit. Many plans allow interest-only minimum payments during this time.
2. Repayment period — often 10 to 20 years, when the line closes to new borrowing and you repay principal plus interest. Because you’re now paying down principal, payments typically increase — sometimes significantly.

Interactive · the two phases

Tap each phase to see what happens to your payment

Draw period · ~10 yrsRepayment period · ~10–20 yrs

Borrow as you need it

You can draw up to your limit and, on many plans, pay interest only. Payments stay low because you are not yet paying down the balance.

$708

Draw

$985

Repay

Example only: $100,000 balance at 8.5%, interest-only in the draw period vs. a 15-year payoff in repayment. Your terms will differ — $708/mo vs. $985/mo here.

How the rate works

HELOC rates are usually variable. The rate is built from an index plus a margin set by the lender, often with a rate cap and floor. The most common index is the Prime Rate, which banks set based partly on the federal funds rate targeted by the Federal Reserve. So as the Fed moves rates, your HELOC rate — and payment — can move too.

How much can you borrow?

Lenders cap your combined loan-to-value (CLTV) — all the loans on your home divided by its value. The Federal Reserve’s consumer booklet uses 75% as an illustration; in practice, many lenders go up to roughly 80–85%, depending on your credit and the property.

A simple way to estimate your potential line:

Home value × CLTV limit − current mortgage balance = estimated available credit

For example, a $400,000 home at an 80% CLTV limit gives $320,000; subtract a $250,000 mortgage balance and about $70,000 could be available (subject to underwriting).

Common uses — and the risks

HELOCs are often used for larger, planned expenses like home improvements, education, or medical bills. The Federal Reserve specifically cautions against using them for day-to-day spending.

The most important risk is simple: your home is the collateral. Failure to repay could mean losing your home. And because the rate is variable, your payment can rise.

One consumer protection worth knowing: if the HELOC is secured by your principal dwelling, the Truth in Lending Act gives you a three-business-day right to cancel after opening the account, for any reason, in writing.

A note on taxes

Whether HELOC interest is tax-deductible depends on how you use the money — generally only when funds are used to buy, build, or substantially improve the home securing the loan, and subject to IRS limits. Tax rules change and depend on your situation, so consult a tax advisor.

The bottom line

A HELOC can be a flexible, lower-cost way to tap home equity — but the variable rate and the payment jump at the start of the repayment period mean it pays to understand the terms first. If you’d like help comparing a HELOC against a home equity loan or cash-out refinance for your situation, reach out to EON — there’s no credit pull to start the conversation.