What is a home equity line of credit (HELOC)?

By Jane Meggitt

Reviewed by Kimberly Rotter

Mar 16, 2023

Read time: 4 min

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Key Takeaways:

  • A home equity line of credit (HELOC) works like a credit card, allowing you to borrow, repay, and borrow more up to your credit limit for several years.  

  • Most HELOCs have variable interest rates, so the cost of borrowing can go up and down. 

  • A fixed-rate HELOC removes uncertainty and protects you from changing interest rates.

Big expenses, like paying off credit cards or fixing your roof, can feel totally out of reach, but the finish line might be nearer than you think. As a homeowner, you’ve got a valuable asset in your pocket. Your home might be the bridge between today’s hopes and tomorrow’s reality. A home equity line of credit (HELOC) is usually bigger than a personal loan and might be easier to qualify for. Let’s take a closer look.

What is a home equity line of credit?

A home equity line of credit, or HELOC, is a way to access cash without having to sell your home. Your home equity is the difference between what your home is worth and how much you owe on it. If your mortgage balance is less than your home’s value, you have equity and might be able to use a HELOC to reach your next financial goal. 

You can borrow against your equity to consolidate debt, cover a financial emergency, pay for a large expense like home renovations, or even start a business. 

What’s different about a HELOC?

A HELOC is similar to a home equity loan, and even to your primary mortgage. But there are key differences to know about:

A HELOC works like a credit card

Similar to credit cards, a HELOC is a revolving line of credit. The HELOC credit limit is your loan limit. You can make purchases or withdraw money up to your credit limit, pay it down via a monthly payment, and use your line of credit again, as often as you like during your draw period (the first few years after you get your HELOC). The length of the draw period depends on the lender but is usually five years or longer.

How HELOC monthly payments work

With a typical HELOC, you make interest-only payments on the amount you’ve withdrawn. When your draw period ends, you’ll start making principal and interest payments, so your monthly payment amount could spike sharply. 

If you get a fixed-rate HELOC, you’ll make a principal and interest payment based on your balance each month.

In either case, your HELOC payments can vary during the draw period as you borrow, repay, and borrow more.

When the draw period ends, the repayment period starts. Most HELOCs can be converted to a fixed-rate loan at this time. During repayment, your monthly payment amount will be the same, calculated to pay off your loan in full by the end of your loan’s term. Repayment periods generally last between 10 and 20 years.

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How much are HELOC closing costs?

HELOC closing costs generally range from 2% to 5% of your loan amount. When HELOCs are available with no closing costs, it’s because they come with a higher interest rate, which could mean a higher total cost over the life of the loan.

HELOC closing costs are similar to those you paid for your mortgage. They might include these:

  • Appraisal fee: $350 to $500 

  • Credit report fee: $30 to $50

  • Document preparation fee: $50 to $100

  • Loan recording fee: $15 to $50

  • Title search fee: $75 to $200

  • Origination fee: 1% to 5% of the loan amount

Different kinds of home equity loans

Most HELOCs have a variable interest rate. As rates go up and down, so do your overall costs. You won’t know what your rate will be from month to month, at least until the repayment period begins. A standard HELOC isn't your only choice. There are other types of home equity loans available. 

Fixed-rate HELOC

This kind of HELOC combines the best features of a HELOC (the draw period) and a home equity loan (the fixed interest rate). You don’t have to take a lump sum up front unless you want to, and the cost of your loan won't go up over time. A fixed-rate HELOC is harder to find. Some lenders advertise a fixed-rate HELOC, but they are actually offering a hybrid HELOC.

Hybrid HELOC

With a hybrid HELOC, the interest rate on your entire loan might not be fixed from the day your loan closes, but it’s not variable either. You can lock in different interest rates on different chunks of your balance. Sometimes there’s a limit to how many times you can do this.

Home equity loan 

A home equity loan is typically at a fixed interest rate. The downside is that you have to take the entire loan up front in a lump sum. You’ll pay interest on the entire amount from day one. That could be problematic if you don’t know exactly how much you’ll need, or if you don’t need it all right away. 

HELOC example

Let’s say your home is worth $350,000 and your current mortgage balance is $150,000. 

All home equity lenders have a loan-to-value limit. That’s the most you can owe against the home. Your HELOC lender allows an 80% loan-to-value ratio, which means you can owe a total of $280,000. Since you only owe $150,000 on your mortgage, you could borrow another $130,000 with a HELOC. 

Learn more about a HELOC

The best way to find out which option is right for your situation is to talk with a knowledgeable mortgage advisor who has experience helping people choose from different financing options.

Jane Meggitt

Jane has written thousands of articles on a broad range of personal finance topics. Her goal is to help people better understand and manage their finances, so they can get rid of debt, boost their savings, buy a home, start investing, or fund their retirement.

kim rotter 2022 2

Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

Frequently asked questions

A HELOC works like a credit card. You can borrow, repay, and borrow more, up to your credit limit. Unlike a credit card, a HELOC doesn’t last forever. You can only use it this way during the draw period.

When the draw period ends, you’ll start the repayment period. Once the repayment period starts, you can no longer spend or withdraw more money against your line of credit. You start making a set monthly payment calculated to pay off your loan by the end of the term.

Yes, it's possible to obtain a HELOC with a fixed interest rate. While most HELOCs have a variable interest rate, some lenders offer fixed-rate options. Choosing a fixed-rate HELOC can provide stability and predictability since you won't have to worry about fluctuations in interest rates, making it easier to plan and manage your finances.

If you're a homeowner needing funds, a Home Equity Line of Credit (HELOC) with a fixed interest rate can be a great option. With a fixed rate, your interest rate will stay the same throughout the loan's life, making it easier to budget your monthly payments. A HELOC can be a flexible and convenient way to access cash for home improvements, debt consolidation, or other expenses.

Although HELOCs and home equity loans are both mortgages and can be used for similar purposes, they aren’t the same thing. 

A HELOC is a line of credit from which you can draw as needed. A home equity loan is a lump sum loan. 

Home equity loans and fixed-rate HELOCs have a fixed interest rate. Standard HELOCs have a variable interest rate during the draw period and may allow interest-only payments for the first few years. 

Deciding whether a HELOC or home equity loan is a better option largely depends on whether you want the option to borrow more as you pay down your loan balance. 

From the time you submit your HELOC application to the time you receive funding averages 15-18 days, but could be shorter or longer. Much depends on how quickly you get the required documents to your lender. Also, the lender needs time to hire a professional appraiser to determine your home’s current market value.

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