How Does a HELOC Work?
A HELOC, or home equity line of credit, is a line of credit backed by your home. You get a limit, generally a percentage of your home's value minus what you owe on your mortgage, and you borrow from it as you need to during the draw period. You pay interest only on what you've drawn. When the draw period ends, you repay the balance on a schedule or all at once, depending on your plan.
Last updated October 31, 2026How do you borrow from a HELOC?
Once the line is open, you can draw up to your limit whenever you want, usually with a transfer, special checks or a card. Some plans set a minimum for each draw or ask for an initial draw when the line is set up.
Here's how the limit moves. Say you have an $80,000 line and use $25,000 for a new roof. You owe interest on the $25,000, and $55,000 is still there if you need it. Pay back $10,000 and that $10,000 is available to draw again, the way a credit card works.
What do the payments look like?
During the draw period, some plans ask for a minimum payment that includes some principal. Others let you pay interest only. Most HELOCs have a variable rate made of two parts: an index, such as the prime rate, plus a margin the lender adds. When the index moves, your payment moves with it, even if you don't draw another dollar.
Two features can help. Some lenders offer a lower introductory rate for the first few months, and some let you lock part of your balance at a fixed rate, usually a bit higher than the variable one, for steadier payments.
What happens when the draw period ends?
You move into the repayment period, and new draws stop. Many plans set a schedule to repay the full balance, often over 10 or 15 years. Others call for the whole balance at once, a balloon payment, which you'd cover with savings, a refinance or another loan. Your agreement says which kind you have, so read that part before you sign.
The line can change along the way, too. HELOCs generally let the lender freeze or lower your limit if your home's value drops or your finances take a turn for the worse.
What rights do you have?
You get a written disclosure of the APR, how the variable rate works, the payment terms and the fees, usually along with the application, plus a federal booklet on HELOCs. On your main home, you can cancel within three business days after the latest of these: the line being opened, your notice of the right to cancel and your material disclosures. The lender has to return what you paid, including application and appraisal fees.
It depends on your plan:
- Interest-only draw period: lower payments now, with the principal still to repay later.
- Principal and interest during the draw: higher payments now and a smaller balance when the draw ends.
- Scheduled repayment: the balance is spread over a set term after the draw period.
- Balloon at the end: the full balance comes due at once.
- Fixed-rate option: part of the balance at a set rate for predictable payments.
| Credit limit | Generally a percentage of your home's appraised value minus your mortgage balance |
|---|---|
| Interest | Charged only on the amount you've drawn |
| Rate | Usually variable: an index plus a margin |
| After the draw period | Scheduled repayment, often over 10 or 15 years, or a balloon payment |
| Right to cancel | Three business days after the latest of opening, the cancel notice and the disclosures, on your main home |
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Sourced from licensed loan officers and brokers in the FreeRateUpdate network.
Educational information only, not individualized financial or legal advice. Program details and rates change; verify current terms with a licensed loan officer before making a decision.