Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) is a revolving credit facility secured by a second lien on a borrower's primary or secondary residence that allows the homeowner to draw funds up to a set credit limit during a draw period, repay and redraw as needed, and then repay the outstanding balance during a subsequent repayment period, with interest typically charged at a variable rate tied to a market index.
A Home Equity Line of Credit leverages the equity a homeowner has built in their property — the difference between the home's current appraised value and any outstanding mortgage balance — as collateral for a revolving credit facility. HELOCs function similarly to credit cards in their revolving draw structure but are secured debt, meaning the lender has a legal claim on the property if the borrower defaults, which results in significantly lower interest rates than unsecured revolving credit.
A typical HELOC has two phases. The draw period — commonly ten years — during which the borrower can access funds up to the credit limit, repay them, and redraw as needed. During the draw period, minimum payments are generally interest-only on the outstanding balance, keeping payments low while the line is actively used. The repayment period — typically ten to twenty years following the draw period — during which no further draws are permitted and the outstanding balance must be repaid as a fully amortizing loan, often resulting in a meaningful increase in monthly payments if a large balance was accumulated during the draw period.
HELOC interest rates are almost universally variable, typically tied to the U.S. prime rate plus or minus a fixed margin. The prime rate moves in tandem with the Federal Reserve's federal funds rate target. As a result, HELOC interest costs rise when the Fed tightens monetary policy and fall when it eases. Borrowers who carried large HELOC balances into the Fed's 2022-2023 rate-hiking cycle saw their borrowing costs increase substantially as prime rate rose from 3.25% to 8.50% over approximately 16 months.
The amount a lender will extend under a HELOC is governed by the combined loan-to-value (CLTV) ratio — the sum of the first mortgage balance and the HELOC limit divided by the property's appraised value. Most lenders cap CLTV at 80% to 90% for HELOCs, though some credit unions and niche programs allow higher CLTVs with additional risk-based pricing. Properties with substantial equity — purchased years earlier or in markets with strong appreciation — offer greater HELOC capacity.
HELOC interest may be tax-deductible under the Tax Cuts and Jobs Act of 2017 when the proceeds are used to buy, build, or substantially improve the home securing the line. Interest on HELOC funds used for non-home-improvement purposes — such as debt consolidation, tuition, or general expenses — is not deductible under current law. Borrowers should consult qualified tax professionals to assess deductibility in their specific circumstances.
HELOCs are widely used for home renovation financing, where their revolving structure suits the episodic disbursement profile of construction projects. They are also used for bridge financing, emergency reserves, and tax-managed income planning by high-net-worth borrowers. Their flexibility makes them one of the most versatile home equity instruments available, though the variable rate structure and potential for payment increases at end-of-draw-period recast require careful management for borrowers who carry ongoing balances.