Home Equity Line of Credit (HELOC)

A lender sets your credit limit from the home’s appraised value, what you already owe on it, and your income and credit. You borrow against your home equity only when you need to, by check, online transfer or a card tied to the account, and pay interest only on the amount drawn. Some plans require a minimum draw, such as $300, or an advance when the line opens. Opening costs can include an appraisal, an application fee and closing costs, though some lenders waive them; ask about annual, inactivity and early-termination fees too.

The line has two phases. In the draw period, 10 years on many plans, the minimum payment may cover interest alone. When it ends, borrowing stops and the repayment period begins: the lender may amortize the balance over a schedule, often 10 to 20 years, or demand the whole balance at once as a balloon payment.

The rate is usually variable: an index, commonly the prime rate or a Treasury rate, plus the lender’s margin. Federal rules require the index to be public and outside the lender’s control. Watch for a low introductory rate that resets after a few months, and ask whether part of the balance can be locked at a fixed rate.

HELOCs secured by a dwelling fall under Regulation Z, which implements the Truth in Lending Act. Lenders must disclose the APR, how the variable rate works, the payment terms in both phases and all fees, and give you the CFPB’s HELOC booklet, usually with the application.

When the line is secured by your main home, you can cancel in writing for any reason within three business days of opening it or of receiving all required disclosures, whichever is later. That right doesn’t cover a vacation home.

Once the line is open, the lender can’t close it and demand repayment except for fraud, missed payments, or something you do that harms its security. It can freeze new draws or lower the limit if the home’s value falls significantly below the appraised value, if a material change in your finances makes it reasonably doubt you can repay, or if you default. If your line is frozen, ask why, check your credit reports for errors, and consider a new appraisal or another lender.

Check what the agreement says about renting, too: the CFPB booklet warns that renting your home to others may be prohibited under a line’s terms, which matters for house hacking. If you sell the home, the line generally must be paid off in full.

Only in one situation. HELOC interest counts as deductible mortgage interest only to the extent the money buys, builds or substantially improves the main or second home that secures the line, and only if you itemize. That debt also counts toward the $750,000 limit on acquisition debt ($375,000 if married filing separately) for loans taken after December 15, 2017. The One Big Beautiful Bill Act made these rules permanent, so interest on home equity debt spent on anything else stays nondeductible.

A draw used for tuition, a car or card balances earns no deduction, even though the lender’s Form 1098 may report all of the interest. Routine repairs such as repainting aren’t substantial improvements unless they are part of a larger renovation. Keep records that tie each draw to the project it paid for.

All three borrow against home equity, and all three put the house at risk if you can’t pay. They differ in how the money arrives and what happens to your first Mortgage.

A HELOC suits costs that arrive over time, such as a phased renovation, because interest accrues only on what you draw. A home equity loan suits one known cost and gives fixed, equal payments. A cash-out refinance replaces your first mortgage, so it can make sense when current rates are no higher than your existing rate but gets costly when rates have risen, because the new rate then applies to the whole balance. Compare offers by APR and total fees, not by payment alone.

For owners 62 and older, a reverse mortgage needs no monthly payment, but its fees can run higher than a HELOC’s, and its balance grows instead of shrinking.

The appeal is flexibility. You pay interest only on what you draw, usually at a lower rate than a credit card or an unsecured personal line, and an unused line costs little beyond any annual or inactivity fee. The drawbacks are a rate that floats, a payment that jumps when repayment starts, and your home as collateral.

That flexibility is why some households keep a line as a backstop behind an emergency fund, and some retirees keep one so they don’t have to sell investments after a market drop, a defense against sequence-of-returns risk. Both uses share a weak spot: the downturn that makes you want the money can also lead a lender to freeze or cut the line, and a new application needs income that is harder to show once you stop working.

A drawn balance also raises your debt-to-income ratio. Before drawing, budget for the repayment-period payment rather than the interest-only one, and plan how the balance gets repaid if you sell the home.