How Does a HELOC Work?

A home equity line of credit (HELOC) is one of the most flexible ways to tap into your home’s equity, it can also be complex.

That’s because HELOCs, unlike other home equity loans, are a revolving line of credit backed by your home’s equity. They feature draw and repayment periods, and tend to be highly tailored to your personal circumstances.

Read on to learn more about HELOCs, and learn whether you might qualify for one.

What Is a HELOC?

A HELOC is a revolving credit line that lets you borrow against your home equity and pay interest only on the amount you actually use.

It’s different from a home equity loan in that you can borrow as needed. Think of it like a credit card secured by your home’s equity. A home equity loan is more straightforward, and features a lump sum followed by fixed payments.

The Two Phases of a HELOC: Draw Period and Repayment Period

HELOCs are typically separated into a draw period where you can borrow against your limit, and a repayment period when you pay back that money.

Exact terms vary by lender, but you might only be required to pay interest during the draw period whereas during the repayment period you’ll be both principal and interest.

HELOC draw and repayment period time timeline

A Step-by-Step Guide to How HELOC Borrowing and Repayments Work

A HELOC works a lot like a credit card, except your home secures it.

Here’s what that looks like in real life:

1. You open a HELOC with a $100,000 limit. At this moment, the draw period begins. Some lenders require an initial draw, so let’s say you kick off the HELOC with a $50,000 draw to renovate your kitchen.
2. You pay interest only on the $50,000 you used, not the full $100,000 line.
3. You decide to pay more than interest, and repay $50,000 over time.
4. Because it’s revolving credit, you can re-borrow available credit during the draw period up to the limit.

Then the repayment period begins:

• You typically can’t borrow any more.
• Monthly payments often increase because you’re paying back both principal and interest on what you used.

Even if you have a $0 balance when the repayment period starts, the line may close to new borrowing once the draw window ends.

How Do You Qualify for a HELOC?

As with any mortgage, HELOC approval is highly dependent on your personal circumstances. Here’s a breakdown of what you’ll typically need to be approved for a HELOC:

Home equity: There’s no universal set amount of home equity you’ll need to qualify for a HELOC, but many lenders require at least 15%.

Credit score: Exact credit score requirements vary, since other factors also affect approval, but a stronger credit score generally translates to stronger odds of approval. That doesn’t mean you can’t get a HELOC if you have bad credit, however.

Debt-to-income (DTI) ratio: Your DTI is calculated using all of your recurring monthly debts against your pre-tax income. A lower DTI usually means better terms and approval odds.

Combined loan-to-value (CLTV): This is the value of all current loans on your home against its value. Let’s say a lender allows up to 85% of a home’s value in a HELOC. For a $400,000 home, that would be $340,000. Now let’s say you owe $250,000 on that home, and also have a $20,000 home equity loan for a total of $270,000. You’d subtract that from the $340,000 to get $70,000. That’s your HELOC limit using CLTV.

How HELOC Credit Limits and Interest Rates Are Determined

Credit limits (how much you can borrow)

Your credit limit is usually based on:

• Your home’s appraised or validated value
• Your current mortgage balance
• The lender’s CLTV cap.
• Your property type
• And your credit profile

Interest rates (how much you’ll pay)

Many HELOCs use variable rates, often tied to a benchmark like the prime rate. That means your rate and payment can rise or fall over time. Some HELOCs have a fixed rate, meaning your rate stays the same throughout the life of the loan and payments stay predictable.

Benefits and Risks of Using a HELOC

A HELOC can be a great tool, but only when you understand the trade-offs.

A HELOC tends to work best when you have a specific purpose, a repayment plan, and a budget that can handle rate changes.

How People Use a HELOC

HELOCs have traditionally been used for phased expenses, like home renovation and education. But in recent years, people have increasingly used them for debt consolidation.

The Mortgage Bankers Association reported in its 2025 Home Equity Lending Study that, while just 25% of borrowers said they used a HELOC for debt consolidation as of 2022, that number had increased to 39% as of 2024.

Home renovation usage fell to 46% in 2024, down from 65% in 2022.

The Bottom Line

A HELOC is a revolving credit line secured by your home equity. You typically borrow during a draw period, then repay during a repayment period. Your borrowing limit is usually based on CLTV rules, and your rate is often variable. That means your payment can change over time.

If you want flexibility and a way to access equity without refinancing your main mortgage, a HELOC can make sense, especially with a clear plan and disciplined repayment strategy.

Frequently Asked Questions

What factors affect my HELOC approval and credit limit?

Home equity, credit score, income, DTI, property value, and the lender’s CLTV cap are major factors.

How do I borrow funds during the draw period?

Lenders commonly provide access via transfers, checks, or other tools depending on the product. The key is that you can usually borrow and repay repeatedly during the draw window.

What happens when the repayment period begins?

Borrowing usually stops, and payments typically rise to include principal + interest until the balance is paid off.

Can I get a fixed rate on a HELOC?

Many HELOCs are variable-rate, but some lenders offer options to lock portions of your balance into a fixed rate. Availability varies by lender and product.

What happens if I miss HELOC payments?

Missed payments can damage your credit and may put your home at risk because the HELOC is secured by your property.