Everything you need to know about home equity lines of credit, from how they work to smart strategies for using them.
NMHL Team2026-02-0513 min read
What Is a HELOC?
A Home Equity Line of Credit, commonly known as a HELOC, is a revolving line of credit secured by the equity in your home. Unlike a traditional mortgage or home equity loan that provides a lump sum, a HELOC works more like a credit card. You are approved for a maximum credit limit based on your available equity, and you can borrow against that limit as needed during the draw period, which typically lasts 5 to 10 years. During the draw period you generally make interest-only payments on the amount you have borrowed. Once the draw period ends, you enter the repayment period, usually lasting 10 to 20 years, during which you can no longer borrow and must repay both principal and interest. HELOCs carry variable interest rates tied to an index such as the prime rate, meaning your payments can fluctuate over time. Lenders typically allow you to borrow up to 80 to 85 percent of your home value minus your existing mortgage balance. Because your home serves as collateral, HELOCs generally offer lower interest rates than unsecured borrowing options like credit cards or personal loans.
HELOCs typically offer interest rates 2-4% lower than credit cards, making them an efficient way to access funds for major expenses when used responsibly.
Key Tips
Understand the difference between the draw period and repayment period before signing
Check whether your HELOC has an annual fee or inactivity fee
Ask about rate caps that limit how much the variable rate can increase
How HELOCs Work
The mechanics of a HELOC involve two distinct phases. The first phase is the draw period, which typically lasts between 5 and 10 years. During this time you can borrow money up to your approved credit limit, repay it, and borrow again as often as you need. Most lenders provide a checkbook or debit card linked to your HELOC for convenient access. Monthly payments during the draw period are usually interest-only, though you can choose to pay down principal as well. The second phase is the repayment period, which typically spans 10 to 20 years. Once you enter repayment, the line of credit closes and you begin making fully amortized payments of both principal and interest. This transition often results in significantly higher monthly payments, which catches some borrowers off guard. Interest on a HELOC is calculated daily on your outstanding balance, so the more you borrow and the longer you carry a balance, the more interest you pay. Some lenders offer the option to convert a portion of your variable-rate balance to a fixed rate, providing more payment predictability. It is also important to know that lenders can freeze or reduce your credit line if your home value drops significantly or your financial situation changes.
When the draw period ends and repayment begins, monthly payments can increase by 50% or more. Plan ahead for this transition.
Key Tips
Make principal payments during the draw period to reduce the repayment shock
Keep track of your draw period end date and budget for higher payments
Consider a fixed-rate conversion option if your lender offers one
HELOC Qualification Requirements
Qualifying for a HELOC requires meeting several criteria related to your home equity, creditworthiness, and financial stability. Most lenders require you to have at least 15 to 20 percent equity in your home after accounting for the HELOC. For example, if your home is worth $400,000 and you owe $280,000 on your mortgage, you have $120,000 in equity, and a lender allowing up to 85 percent combined loan-to-value would approve a HELOC of up to $60,000. Credit score requirements typically start at 620, but the best rates and terms are reserved for borrowers with scores of 700 or higher. Lenders also examine your debt-to-income ratio, which should generally be below 43 percent, including the potential HELOC payment. Stable employment and verifiable income are essential, and most lenders require at least two years of consistent income history. You will need to provide documentation including pay stubs, tax returns, bank statements, and proof of homeowners insurance. An appraisal of your property may be required to determine current market value, though some lenders offer automated valuation models for faster processing. Self-employed borrowers may need to provide additional documentation such as profit and loss statements.
Key Tips
Check your credit score and address any issues before applying
Calculate your available equity using recent comparable sales in your area
Gather financial documents in advance to speed up the application process
HELOC vs. Home Equity Loan
While both HELOCs and home equity loans allow you to borrow against your home equity, they function quite differently. A home equity loan provides a lump sum of money at a fixed interest rate with predictable monthly payments over a set term, typically 5 to 30 years. A HELOC, by contrast, provides a revolving credit line with a variable interest rate that you can draw from as needed. The right choice depends on your specific needs. Home equity loans are ideal when you need a specific amount for a one-time expense such as a major renovation or debt consolidation, and you prefer the certainty of fixed payments. HELOCs are better suited for ongoing or unpredictable expenses, such as funding a home improvement project in stages or covering college tuition over several years. Interest rates on home equity loans are typically slightly higher than initial HELOC rates because you are paying for the security of a fixed rate. However, HELOC rates can rise over time and may eventually exceed home equity loan rates. Closing costs for both products are similar and may include application fees, appraisal fees, and title search fees, though some lenders waive these for HELOCs. Both products offer potential tax deductibility of interest when funds are used for home improvements, subject to IRS limits.
If you need funds for a single large expense with a known cost, a home equity loan may be better. If you need flexible access to funds over time, a HELOC is typically the better choice.
Key Tips
Compare total interest costs over the life of both products
Factor in the risk of rising rates when considering a HELOC
Ask lenders about hybrid products that combine features of both
Smart Strategies for Using a HELOC
Using a HELOC wisely can save you money and help build wealth, but using it poorly can put your home at risk. The most financially sound use of a HELOC is for home improvements that increase your property value, as this effectively recycles your equity into greater equity. Renovations like kitchen remodels, bathroom updates, and adding living space typically provide the best return on investment. Another smart strategy is debt consolidation, using the lower HELOC rate to pay off high-interest credit card debt. However, this only works if you avoid running up credit card balances again. Some homeowners use a HELOC as an emergency fund, keeping the line open but unused as a financial safety net. This avoids interest charges while providing peace of mind. Using a HELOC for investments can be risky but may make sense in certain situations, such as funding a rental property down payment if the expected returns exceed the HELOC interest rate. Avoid using a HELOC for everyday expenses, vacations, or depreciating assets like cars. Remember that your home secures the debt, and defaulting on HELOC payments can lead to foreclosure. Always borrow conservatively, keeping your total utilization well below the maximum limit, and have a clear repayment plan before drawing funds.
Key Tips
Only borrow what you can comfortably repay within 5-7 years
Keep your HELOC utilization below 50% of your credit limit for financial safety
Create a written repayment plan before using your HELOC for any purpose
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Frequently Asked Questions
Most lenders require a minimum credit score of 620 for HELOC approval. However, to qualify for the best interest rates and highest credit limits, a score of 700 or above is recommended. Some credit unions may offer more flexible requirements, but expect higher rates with lower scores.
HELOC interest may be tax deductible if the funds are used to buy, build, or substantially improve the home securing the loan. Under current tax law, you can deduct interest on up to $750,000 of total mortgage debt. Using HELOC funds for other purposes such as debt consolidation or personal expenses does not qualify for the deduction.
If your home value declines significantly, your lender may freeze your HELOC, reduce your credit limit, or require immediate repayment. This is because the loan-to-value ratio has changed unfavorably. You would still be responsible for repaying any balance already drawn.
Most HELOCs do not have prepayment penalties, so you can pay off the balance at any time without extra charges. However, some lenders charge an early termination fee if you close the line of credit within the first two to three years. Check your specific loan agreement for details.
The HELOC application and approval process typically takes 2 to 6 weeks. This includes submitting your application, providing documentation, the appraisal process, underwriting review, and closing. Some lenders offer expedited processing that can reduce this timeline to as little as 2 weeks.
