HELOC rates: how a home equity line of credit works and what to compare
A home equity line of credit (HELOC) is a revolving line secured by your home. You can borrow, repay and borrow again up to a limit, much like a credit card, but at a lower rate because the house is the collateral.
How it works
- Credit limit: lenders typically let you borrow up to a set share of your home’s value, minus what you still owe on the mortgage. This share is called the combined loan-to-value ratio (CLTV).
- Draw period: the CFPB says this could last around 10 years. You can borrow as needed, usually by transfer, special checks or a card, and may only have to pay interest.
- Repayment period: often 10 or 20 years. You can no longer borrow, and payments jump because principal is now included. Some plans require the full balance as a lump sum when the draw period ends.
- Variable rate: most HELOCs follow the prime rate plus a margin, so payments rise when rates rise. Some lenders let you lock part or all of the balance at a fixed rate, which is usually higher but predictable.
Working out your limit
Suppose your home is worth $400,000 and you owe $220,000 on the mortgage. A lender allowing an 85% CLTV would cap total borrowing at $340,000. Subtract the mortgage, and the maximum line is $120,000. Your credit score, income and debts then determine whether you qualify for all of it.
Costs to compare
- the margin over the index, and any introductory rate and when it ends
- rate caps (per adjustment and lifetime)
- appraisal, application and closing costs
- annual or inactivity fees
- early closure fees if you close the line within a few years
- minimum draw requirements
A low introductory rate matters less than the margin, because the margin applies for the rest of the line’s life.
Payment shock at the end of the draw period
Interest-only payments can look small. When the repayment period starts, the same balance must be repaid with interest over a shorter time. On a $50,000 balance at 8%, the interest-only payment is about $333 a month; repaying the same balance over 10 years takes about $607 a month. Model the repayment-period payment before you borrow, and consider paying principal during the draw period.
The risks
Your home secures the debt: if you cannot pay, you could lose it, as the FTC warns about all home-secured borrowing. The CFPB also notes that lenders can freeze or reduce a line if your home’s value drops significantly or your finances change, so do not count on unused credit for emergencies.
Your right to cancel
For a HELOC secured by your main home, federal rules under Regulation Z generally give you three business days after opening to cancel without penalty. The lender must give you a notice explaining this right.
HELOC or home equity loan?
A home equity loan gives you a lump sum at a fixed rate with fixed payments. It suits a single known cost, such as a roof. A HELOC suits staged or uncertain costs, such as a remodel paid in phases. With mortgage rates above 7% in late 2026, many owners with low first-mortgage rates prefer a HELOC or home equity loan over a cash-out refinance, because it leaves the cheap first mortgage untouched.
Tax treatment
The IRS says interest on home equity debt is deductible only when the money is used to buy, build or substantially improve the home that secures the loan, and only within the overall mortgage debt limits. Interest on a HELOC used to pay off credit cards or buy a car is not deductible. Check current rules or ask a tax professional.
Good and poor uses
Reasonable uses: home improvements that add value, a planned major expense with a clear repayment plan, or replacing much higher-rate debt if spending habits are under control.
Risky uses: everyday spending, vacations, investing borrowed money, or consolidating card debt without a plan to stop new balances. You would be turning unsecured debt into debt secured by your home.
Before you apply
Get quotes from at least three lenders, including a credit union, and read the CFPB’s HELOC booklet, which lenders must give you with an application. Compare the margin, fees and repayment terms, not just the starting rate.
Common questions
Does opening a HELOC affect my credit score?
The application usually involves a hard inquiry. Balances may also affect your score, depending on how the account is reported.
Can I pay off a HELOC early?
Usually yes, but some lenders charge an early closure fee if you close the line within the first few years.
What happens to my HELOC if I sell the house?
The line must be paid off at closing, along with your mortgage.