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