Homeowners who've built up equity often sit on a large, mostly untapped source of cheap borrowing. A HELOC unlocks that equity without forcing you to sell or refinance your entire mortgage. Unlike a home equity loan, which hands you a lump sum upfront, a HELOC works more like a credit card attached to your house: you get approved for a maximum limit, then draw against it whenever you need cash, paying interest only on what's outstanding.
How the Draw and Repayment Periods Work
A typical HELOC has two phases. The draw period — often 10 years — lets you borrow, repay, and re-borrow up to your limit, usually with interest-only minimum payments. Once the draw period ends, the repayment period begins (often 10-20 years), during which you can no longer draw new funds and must pay down both principal and interest on whatever balance remains.
Worked Example
Say your home is worth $400,000 and you owe $220,000 on your mortgage. At an 80% combined loan-to-value (CLTV) limit, a lender might approve a HELOC up to: (400,000 × 0.80) − 220,000 = $100,000 available credit. You draw $60,000 to renovate a kitchen. At a variable rate of 9% APR, interest-only payments during the draw period would run about $450/month on that $60,000 balance.
| Item | Amount |
|---|---|
| Home value | $400,000 |
| Existing mortgage balance | $220,000 |
| Max HELOC (80% CLTV) | $100,000 |
| Amount drawn | $60,000 |
| Interest-only payment @ 9% | ~$450/mo |
Why the Rate Being Variable Matters
Most HELOCs charge a rate tied to the prime rate plus a margin (e.g., prime + 1.5%). When the Federal Reserve raises rates, your HELOC payment can climb even if your balance hasn't changed — a key risk compared to a fixed-rate home equity loan or first mortgage. Always model a rate-increase scenario before relying on a HELOC for ongoing expenses.
Figures above are illustrative estimates only, not financial advice. Actual lender terms, rates, and CLTV limits vary.