How Does a HELOC Work?
A home equity line of credit lets you borrow against the equity in your house, draw what you need over time, and usually pay interest-only while the line is open. Here is the structure, the math, and a worked example with real numbers.
The 30-second summary
- A HELOC is a revolving line of credit secured by your home - more like a credit card than a second mortgage.
- Draw period (typically 10 years): borrow up to your limit, usually interest-only on what you have drawn.
- Repayment period (typically 20 years): no new draws; principal + interest amortises the balance.
- On a $600k home / $300k mortgage / 85% CLTV, max line is $210,000. Drawing $100,000 at 8.5% costs about $708/month interest-only.
- Rate is almost always variable (prime + margin). Lenders can freeze or cut the line if values or credit slip.
The two phases
1. Draw period
Usually 10 years. You can draw, repay, and redraw up to your credit limit. Most HELOCs let you pay interest-only on the drawn balance during this window, which keeps the payment low but does not reduce principal unless you choose to.
2. Repayment period
Usually 20 years. The line closes to new draws. Your payment becomes principal plus interest, sized to clear the outstanding balance over the remaining term. That is when the payment often jumps - plan for it before you draw the full line.
How much can you borrow?
Lenders look at combined loan-to-value (CLTV) - your existing mortgage plus the HELOC, divided by home value. Typical caps are 80-90%:
Max HELOC = (Home Value × CLTV cap) − Existing Mortgage Balance
Qualification also depends on credit score, debt-to-income ratio, income documentation, and the lender's overlays. The formula above is the equity ceiling, not a guarantee.
Worked example: $100,000 draw on a $600,000 home
Numbers from the HELOC calculator:
| Home value | $600,000 |
| Current mortgage | $300,000 |
| CLTV cap | 85% |
| Max line of credit | $210,000 |
| Amount drawn | $100,000 |
| Draw APR | 8.5% |
| Interest-only payment (draw) | ~$708/mo |
| P&I payment (20-yr repayment) | ~$868/mo |
| Total interest over life (est.) | ~$193,300 |
Notice the payment jump when the repayment period starts ($708 → $868) even with the same balance and rate. If you had drawn the full $210,000 line, that jump would be larger - size the line for what you can amortise later, not just what you can carry interest-only today.
HELOC vs the alternatives
- Home equity loan - fixed lump sum, fixed rate, P&I from day one. Better when the expense is known and you want payment certainty. See HELOC vs home equity loan.
- Cash-out refinance - replaces your first mortgage with a larger one and pays you the difference. Usually higher closing costs; makes sense when you also want to reset the first-lien rate. See HELOC vs cash-out refinance.
FAQ
How does a HELOC work?
Revolving credit secured by your home. Draw period (borrow, usually interest-only), then repayment period (no new draws, amortising payments). Rate is typically variable.
How much can I borrow with a HELOC?
Max line ≈ (home value × CLTV cap) − mortgage balance. At 85% CLTV on a $600k home with a $300k mortgage, that is $210,000.
What is the difference between the draw period and the repayment period?
Draw: access the line, usually interest-only. Repayment: line freezes to new draws and you pay principal + interest until the balance is gone.
Are HELOC rates fixed or variable?
Almost always variable (prime + margin). Some products let you fix a drawn portion. Payments move when prime moves.
Is HELOC interest tax-deductible?
Possibly, if used to buy, build, or substantially improve the securing home, within IRS limits. Other uses generally are not. Ask a tax professional.
HELOC vs home equity loan - which should I pick?
HELOC for flexible, staged spending. Home equity loan for a known lump sum and a fixed payment. Compare both in the side-by-side guide.
What are typical HELOC closing costs?
Often $0-$500 and frequently waived. Watch for annual fees, early-closure fees, and appraisal costs on the Loan Estimate.
Can a lender freeze or reduce my HELOC?
Yes - if home values fall, credit worsens, or payments are missed. That revolving risk is the main trade-off versus a closed-end home equity loan.
Run your numbers
Plug in your home value, mortgage balance, CLTV, draw amount and APR to see interest-only and repayment payments for your situation.
Disclaimer: Estimates only. HELOC terms, rates, CLTV caps, and fees vary by lender, credit, and state. Your Loan Estimate and Closing Disclosure are authoritative. This is not financial advice.