How does a HELOC work?

A HELOC is a revolving line of credit secured by your home equity. You can borrow up to your credit limit during a draw period (usually 10 years), paying only interest on what you use. After the draw period, you enter repayment (10-20 years) and pay principal plus interest.

What is the current HELOC rate?

As of 2026, average HELOC rates range from 7.5% to 9.5% depending on credit score and LTV ratio. HELOCs use variable rates tied to the prime rate, so your rate will change as the Fed adjusts rates.

HELOC Guide: How Home Equity Lines of Credit Work (2026)

A HELOC (Home Equity Line of Credit) lets you borrow against your home equity as needed, similar to a credit card but at much lower rates. Here’s everything you need to know.

What Is a HELOC?

Feature	HELOC	Home Equity Loan	Cash-Out Refinance
Type	Revolving credit line	Fixed lump sum	New mortgage
Rate	Variable	Fixed	Fixed (usually)
Draw period	5-10 years	None	None
Repayment	10-20 years after draw	5-30 years	New 15-30 year mortgage
Access	Draw as needed	One-time	One-time
Closing costs	Low ($0-$500)	$2,000-$5,000	$3,000-$6,000
Interest-only option	Yes (during draw period)	No	No

How Much Can You Borrow?

Most lenders allow a combined loan-to-value (CLTV) of 80-90%:

Home Value	Existing Mortgage	Available Equity (80% CLTV)	Available Equity (90% CLTV)
$300,000	$200,000	$40,000	$70,000
$400,000	$250,000	$70,000	$110,000
$500,000	$300,000	$100,000	$150,000
$600,000	$350,000	$130,000	$190,000
$750,000	$400,000	$200,000	$275,000

Formula: (Home Value × CLTV %) - Existing Mortgage Balance = HELOC Limit

Current HELOC Rates (2026)

Credit Score	Typical Rate Range	Rate vs. Prime
740+ (excellent)	7.50-8.25%	Prime + 0-0.75%
700-739 (good)	8.00-8.75%	Prime + 0.50-1.25%
680-699 (fair)	8.75-9.50%	Prime + 1.25-2.00%
660-679 (minimum)	9.50-10.50%	Prime + 2.00-3.00%

Prime rate as of early 2026: ~7.50%. HELOC rates move with the prime rate.

HELOC Payment Examples

During the draw period (interest-only):

Balance	Rate	Monthly Interest-Only Payment
$25,000	8.0%	$167
$50,000	8.0%	$333
$75,000	8.0%	$500
$100,000	8.0%	$667
$150,000	8.0%	$1,000

During the repayment period (principal + interest, 20-year):

Balance	Rate	Monthly P&I Payment
$25,000	8.0%	$209
$50,000	8.0%	$418
$75,000	8.0%	$627
$100,000	8.0%	$836
$150,000	8.0%	$1,254

Payment shock warning: When the draw period ends, your payment can increase 25-60% as principal repayment begins.

Qualification Requirements

Requirement	Typical Minimum
Credit score	660-680+
Combined LTV	80-90%
Debt-to-income ratio	Below 43%
Home equity	15-20% minimum
Employment/income	Verified income, 2 years history
Property type	Primary residence (some allow second homes)

HELOC Phases

Phase	Duration	What Happens	Payment Type
Draw period	5-10 years	Borrow, repay, re-borrow up to limit	Interest-only (minimum)
Repayment period	10-20 years	No new borrowing, pay down balance	Principal + interest

Best Uses for a HELOC

Use Case	Good Idea?	Why
Home renovations	✅	Adds value, may be tax-deductible
Emergency fund backup	✅	Low cost if unused
Debt consolidation	⚠️ Careful	Lower rate, but secures debt with home
College tuition	⚠️ Compare	Compare to federal loans first
Business startup	⚠️ Risky	Risking your home for a business
Vacation/luxury	❌ No	Don’t risk your home for discretionary spending
Day-to-day expenses	❌ No	Sign of living beyond means

Tax Deductibility

HELOC interest is tax-deductible IF proceeds are used to “buy, build, or substantially improve” the home:

Use of Funds	Tax Deductible?	Example
Kitchen renovation	✅ Yes	Improving the home
New roof or HVAC	✅ Yes	Substantial improvement
Home addition	✅ Yes	Building onto the home
Debt consolidation	❌ No	Not home improvement
College tuition	❌ No	Not home improvement
Vacation	❌ No	Not home improvement

Maximum deduction: Interest on up to $750,000 of total mortgage debt (combined first mortgage + HELOC).

HELOC vs. Alternatives

Factor	HELOC	Home Equity Loan	Personal Loan	Cash-Out Refi
Rate	7.5-10% (variable)	7-9% (fixed)	8-18%	6-7.5% (fixed)
Closing costs	$0-$500	$2K-$5K	$0	$3K-$6K
Flexibility	Draw as needed	One lump sum	One lump sum	One lump sum
Payment predictability	Variable	Fixed	Fixed	Fixed
Risk to home	✅ Yes	✅ Yes	No	✅ Yes
Best for	Ongoing/variable needs	Known fixed expense	Small amounts, no equity	Large amount, lower rate

Key Takeaways

A HELOC is a revolving credit line using your home equity — draw as needed during a 5-10 year period
Typical rates are 7.5-9.5% (variable, tied to prime rate) — much lower than credit cards
You can borrow up to 80-90% of your home’s value minus your existing mortgage
Interest-only payments during the draw period keep costs low but prepare for payment shock at repayment
Interest is only tax-deductible if funds are used for home improvements
Best used for renovations, large improvements, or as emergency backup — never for discretionary spending

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