What is a HELOC and how is it different from a home equity loan?

A HELOC (Home Equity Line of Credit) is a revolving line of credit secured by your home, similar to a credit card. You have a draw period (usually 10 years) where you can borrow up to your limit and only owe interest on what you've drawn. After the draw period, a repayment period (usually 20 years) kicks in and you pay down the balance in fixed installments. A home equity loan, by contrast, is a lump-sum second mortgage with fixed payments from day one. HELOCs are more flexible; home equity loans are more predictable.

What's the rate on a HELOC?

HELOCs are variable-rate products, typically pegged to the prime rate plus a margin (prime + 0% to prime + 3%, depending on your credit and lender). When the Fed raises rates, your HELOC rate goes up at the next cycle. When it cuts, your rate falls. As of early 2026, prime is 7.5% and typical HELOC rates are 8%–10%. Some lenders offer a fixed-rate conversion option to lock in a portion of your balance at a set rate — useful as a hedge against future rate hikes.

What's the 'payment shock' when the draw period ends?

During the draw period you only owe interest on what you've borrowed. When the repayment period begins, you switch to a fully amortizing payment over the remaining term (usually 20 years). On a $60,000 balance at 8.5%, the interest-only payment is about $425/month. The amortizing payment is about $520/month. That's not a huge jump, but on a $150k balance at 9%, interest-only is $1,125 and amortizing is $1,350 — a $225/month increase, and your balance has to pay down to zero over 20 years.

Can I deduct HELOC interest on my taxes?

Only if the HELOC proceeds were used to 'buy, build, or substantially improve' the home securing the loan. Using HELOC funds for a kitchen remodel or new roof — deductible. Using HELOC funds to pay for a car, a vacation, or to consolidate credit card debt — not deductible, even though the loan is secured by your home. Keep documentation of how you spent the money. The IRS can audit this distinction years later. See our mortgage interest tax calculator for more on how the limits work.

What happens if my home value drops?

Lenders can 'freeze' your HELOC and stop allowing new draws if your home value drops enough that your CLTV exceeds the lender's limit. This happened to millions of homeowners in 2008–2010. If you're counting on a HELOC as an emergency fund, understand that it can disappear exactly when you need it most — during a market downturn. For true emergency liquidity, keep cash in a high-yield savings account instead. A HELOC is a planning tool, not a panic tool.

HELOC Payment Calculator | Draw, Interest-Only, & Repayment Phase

The HELOC: your home's equity, on tap

A Home Equity Line of Credit is one of the most flexible financial tools homeowners have access to. It's a revolving credit line secured by your home — think of it as a credit card with your house as collateral. You can draw on it, pay it down, draw again, over and over during a typical 10-year draw period. You only owe interest on what you've actually borrowed, and the setup costs are usually a fraction of what a cash-out refi would charge.

This calculator models the full HELOC lifecycle: how big a line you qualify for, what the interest-only payment looks like during the draw period, and what happens when the repayment period kicks in and your monthly payment jumps to fully amortize the balance.

How the draw period works

During the 10-year draw period (some lenders offer 5 or 15), you can pull funds from your HELOC whenever you want, up to your approved limit. Most banks issue you a checkbook and a debit card tied to the line. Every draw starts accruing interest immediately at the variable rate.

Your monthly payment during the draw period is interest onlyon your current balance. If you're carrying $60,000 at 8.5%, your monthly bill is $60,000 × 0.085 / 12 = $425. If you pay down some of the balance, your monthly bill drops at the next statement. If you draw more, it goes up. You're never forced to pay principal during this phase, which is what makes HELOCs so flexible — and also what sets up the payment shock at conversion.

The repayment period and payment shock

When the draw period ends (typically year 10), the HELOC converts to a standard amortizing loan. Whatever balance you had on the last day of the draw becomes a new loan that has to be paid off over the remaining 20 years of the 30-year total term. The rate may or may not change — some HELOCs reset to a fixed rate at conversion, others stay variable.

On a $60,000 balance at 8.5%, the amortizing payment over 20 years is about $520/month vs. $425 interest-only — a 22% jump. On a $200,000 balance at 9%, it's $1,500 vs. $1,800 — a 20% jump. That's the classic "HELOC payment shock" and it catches a lot of homeowners off-guard, especially because it happens 10 years after you opened the line when you may have forgotten the conversion was coming.

Maximum line size: the CLTV formula

Lenders size HELOCs based on Combined Loan-to-Value (CLTV) — your first mortgage balance plus the HELOC, divided by home value. Typical max CLTV is 80–85% for prime borrowers, higher for the best credit scores, lower for investment properties. A few lenders (notably credit unions) will go to 95% or even 100% for well-qualified borrowers.

Formula: max line = (home value × max CLTV) − first mortgage balance. On a $550,000 home with a $280,000 first mortgage at 85% max CLTV: max line = ($550,000 × 0.85) − $280,000 = $467,500 − $280,000 = $187,500.

Your actual approved line can be less than this formula suggests, based on income, credit score, and debt-to-income ratio. Lenders also reserve the right to reduce your line later — during the 2008 crisis, banks cut or froze HELOCs at millions of homes whose values had dropped below the CLTV threshold.

The interest rate: variable and unforgiving

HELOCs are almost always variable-rate products, priced as prime rate plus a margin. Prime is currently 7.5%. Margins range from 0% (best credit) to 2–3% (average credit) to 5%+ (subprime). So HELOC rates range from about 7.5% to 12%+ today.

Some lenders offer a fixed-rate conversion feature — you can lock a portion of your balance at a fixed rate for a set term. This is valuable if you've drawn a big balance and want rate certainty. The fixed rate is usually 1–2 percentage points higher than the current variable rate, but it insulates you from future Fed hikes.

When a HELOC beats a cash-out refi

Your first mortgage rate is low.If you have a sub-4% mortgage from 2021, refinancing into a 6.5% cash-out means you're paying more on your entire balance just to access some equity. A HELOC keeps your first mortgage in place at the low rate and only charges you the HELOC rate on what you draw.

You're not sure when or how much you'll need. HELOCs are perfect for staged projects. A renovation that might cost $40k, $60k, or $80k — open a $100k HELOC, draw as needed, pay interest only on what you use. No need to guess the final number upfront.

You want backup liquidity.Some homeowners open a HELOC, leave it undrawn, and treat it as an emergency line. Keep in mind the lender can freeze it in a downturn, so don't rely on it as your only emergency fund. But as a backup to cash savings, it can be valuable.

Closing costs are meaningfully lower. Cash-out refis run 2–5% of loan in closing costs. HELOCs often have $0 to $500 in fees, sometimes with a $50–$100 annual fee. For small balances, the refi fees alone might exceed a year of HELOC interest.

When a cash-out refi beats a HELOC

You want rate certainty.A 30-year fixed refi locks your payment. A HELOC floats with the prime rate. If you're borrowing a large amount and rates might rise, the fixed cost of the refi beats the variable cost of the HELOC over the long run.

You need a large lump sum now. Buying an investment property, funding a major renovation with a fixed budget, consolidating a specific amount of debt — a refi delivers the cash at closing with predictable amortization. See our cash-out refinance calculator for the refi side of the math.

Common HELOC mistakes

Using it like a credit card. HELOC money feels like available credit — because it is. But every dollar you draw becomes secured debt against your home. Buying vacations, cars, or discretionary spending with HELOC funds is how homes get foreclosed.

Ignoring the conversion.A HELOC with a 10-year draw period means the conversion to amortizing happens at year 11. If you're carrying a $150k balance with a $1,125 interest-only payment and the amortizing payment will be $1,800, that's a major budget hit. Plan for it or pay down the balance before conversion.

Paying during the draw period when you don't need to.Some borrowers aggressively pay down HELOC balances during the draw period, then draw again later when they need the cash. That's fine as a strategy, but make sure your HELOC allows paydowns without closing the line.

The HELOC as a tool for investors

Real estate investors love HELOCs because they provide instant capital for down payments on investment properties. Draw $60k, close on a $300k rental at 20% down, and you can reimburse the HELOC from rent surplus or (if using BRRRR) from the cash-out refinance after stabilization.

The math works when the rental's cash-on-cash return exceeds the HELOC rate. At 8.5% HELOC rates, you need a rental returning 10%+ cash-on-cash before the spread is compelling. See our BRRRR strategy calculator and cash-on-cash return calculator for the investor version of this play.

Related tools

See full equity and borrowing power in our home equity calculator. Compare to a full refinance in our cash-out refinance calculator. Check your tax treatment in our mortgage interest tax calculator.

HELOC payment calculator