What is a HELOC and how does it work?
A home equity line of credit is a revolving line of credit that lets you borrow against your home’s equity. You can take what you need when you need it, up to your credit limit, so it’s great for big or ongoing expenses. You only pay interest on the amount you actually use, which can help keep your costs down compared to a lump-sum home equity loan. In some cases, the interest may be tax-deductible if the funds are used to buy, build or substantially improve your home, according to IRS Publication 936.
Understanding the HELOC draw vs. repayment period
Most HELOCs have two phases. First is the draw period, when you can borrow as needed and typically make interest-only payments. After that comes the repayment period, which is when you start paying back both principal and interest. Here’s how each works:
| FEATURE | DRAW PERIOD | REPAYMENT PERIOD |
|---|---|---|
| Access to funds | Borrow as needed up to your credit limit | No additional borrowing allowed |
| Required monthly payment amount | Usually lower—covers interest only | Higher, includes principal and interest |
| Typical duration | Typically 10 years | Typically 20 years |
| Borrowing flexibility | Allowed to draw, repay and redraw | Payments only—no redraws allowed |
HELOC benefits and drawbacks
A HELOC gives you flexible access to funds, but it also comes with risks. Here’s a quick look at the pros and cons:
| Advantages | Disadvantages |
|---|---|
| Flexible borrowing and repayment options | Variable interest rates can increase monthly payments |
| Access to potentially large amounts of money | Risk of foreclosure |
| Interest may be tax-deductible for home improvements | Easy access to funds can lead to overspending |
Bottom line: A HELOC can be a smart way to access your home’s equity, but it takes discipline and financial planning to use it wisely.
Factors that affect HELOC payments
Knowing what impacts your home equity line of credit payments can help you borrow more confidently and avoid surprises down the road.
How interest rates affect your HELOC
Most HELOCs have variable interest rates, which means your rate—and your payment—can go up or down over time. These fluctuations are influenced by a range of factors, including general market conditions and your lender’s terms. Keeping an eye on current mortgage rates can help you plan for changes in your monthly costs.
How the amount you borrow impacts your HELOC
With a home equity line of credit (HELOC), you’re in control of how much you borrow—and how much you pay each month. The more you draw from your HELOC, the higher your monthly payments will be. The good news is that you’ll only pay interest on the amount you use, not your full credit limit. Your borrowing limit is based not just on your home’s equity but your current mortgage balance, credit score and debt-to-income ratio. Every lender weighs these factors a little differently, so talk to yours about how much you may be eligible to borrow.
HELOC vs. home equity loan comparison
Both a home equity line of credit and a home equity loan let you borrow against your home’s value, but they’re structured differently. A HELOC gives you flexible, on-demand access to funds with a variable rate, while a home equity loan provides a lump sum with a fixed interest rate and predictable monthly payments. The table below highlights the key differences to help you choose the option that best fits your needs.
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Interest Rates | Fixed | Variable |
| Payment Type | Lump-sum payment | Flexible draw period |
| Monthly Payments | Consistent | Interest-only payments possible during draw period |
| Best Used For | Immediate, large expenses | Ongoing expenses |
HELOC vs. refinancing a mortgage
If you're looking to tap into your home’s equity without changing your current mortgage, a home equity line of credit could be a smart alternative to refinancing. With a HELOC, you can borrow what you need, without restarting your mortgage term. Use our HELOC Calculator to estimate your line of credit and see how the payments could fit into your monthly budget.
How to refinance your HELOC
Refinancing a home equity line of credit involves replacing your current line of credit with a new loan that may offer better terms, like a lower rate, fixed payments or extended repayment terms.
Depending on your goals, you could:
- Refinance your HELOC into a new HELOC
- Convert to a fixed-rate home equity loan
- Consolidate it through a full mortgage refinance
Follow these steps to complete the process smoothly:
- Review your current HELOC terms: Know your current balance, interest rate, repayment schedule and whether there are any fees or early closure penalties.
- Check your credit and equity: Lenders will consider your credit score and the amount of equity you have in your home. Improving either can help you qualify for better terms.
- Compare lenders and apply: Shop around for competitive rates and terms. Once you've found the right fit, complete the lender’s application process and submit all required documentation.
- Close your new loan: After approval, your new loan will pay off your existing HELOC. You’ll then start repayment under the new structure.
How to pay off a HELOC faster
Paying off your HELOC early can save you money on interest and give you more financial freedom. Here are some practical strategies:
- Make extra payments during the draw period (when you may only owe interest) to reduce your principal faster.
- Switch to biweekly payments instead of monthly. This simple shift can result in an extra full payment each year.
- Apply windfalls such as tax refunds, bonuses or extra income toward the balance.
- Refinance to a shorter term to pay off your balance on a set timeline.
- Set a repayment goal to keep you motivated and on track.