What Is HELOC?
A HELOC is a revolving line of credit secured by a home's equity — similar to a credit card, letting a homeowner borrow, repay, and re-borrow up to a set limit during a draw period, usually at a variable interest rate.
HELOC in plain English
A HELOC is a line of credit secured by your home. You can borrow up to a limit, repay and borrow again during the draw period - often about ten years - and you pay interest only on what you have drawn.
Most HELOCs have a variable rate. When the draw period ends, you start repaying principal and interest, and payments are often much higher.
Worked example
Borrowing $60,000 against your home
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Amount needed
- $60,000
- Home equity loan
- fixed 8.50%, 15 years
- HELOC
- variable, assumed to stay at 9.00%; interest-only draw period, then 20-year repayment
| Step | Calculation | Result |
|---|---|---|
| 1. Home equity loan payment (fixed) | $60,000 at 8.50% over 180 months | $590.84 |
| 2. HELOC payment while drawing (interest only) | $60,000 × 9.00% ÷ 12 | $450.00 |
| 3. HELOC payment once repayment starts | $60,000 at 9.00% over 240 months | $539.84 |
| 4. Payment jump at the end of the draw period | $539.84 − $450.00 | $89.84 |
Fixed loan payment vs HELOC draw / repayment payment: $590.84 vs $450.00 / $539.84. The HELOC starts cheaper because you pay only interest, but the payment rises by about $90 a month when repayment begins - more if its variable rate has gone up. The home equity loan costs more each month from day one but never changes.
What this calculation leaves out
- The HELOC rate is held constant for illustration; a variable rate can rise or fall.
- Closing costs, annual fees and minimum draws vary by lender and are not included.
- Both loans are secured by your home.
Try it: HELOC with your own numbers
Interactive and illustrative: change any value and the results update instantly in your browser. The figures come from the same engines as REAIXO's full calculators.
Home equity: value minus what you owe
Equity is the part of the home's value you own outright. It grows as you pay down the loan and moves with the market.
- Estimated equity
- $180,000
- 36.0% of the value
- Loan-to-value
- 64.0%
- Mortgage balance$320,000
- Equity$180,000
Show the numbers as a table
| Scenario | Home value | Equity | Equity % | LTV |
|---|---|---|---|---|
| Hypothetical: value −10% | $450,000 | $130,000 | 28.9% | 71.1% |
| Today (your estimate) | $500,000 | $180,000 | 36.0% | 64.0% |
| Hypothetical: value +10% | $550,000 | $230,000 | 41.8% | 58.2% |
Formula
Equity = Home value − All loan balancesLTV = Loan balance ÷ Home value × 100Assumptions
- Hypothetical scenarios only change the value; they are not forecasts.
- Selling costs (often 6% to 10%) reduce what you would actually receive.
- Lenders usually let you borrow only up to about 80% to 85% of the value across all loans.
Why it matters
Unlike a home equity loan, a HELOC only charges interest on the amount actually drawn, making it flexible for ongoing expenses like a phased renovation — but variable rates mean payments can rise.
The lender can generally freeze or reduce the line if your home's value falls or your finances worsen, so do not count on unused credit for emergencies you cannot otherwise cover.
What it means for you
How does it affect my budget?
Plan for the payment at the end of the draw period and at a higher rate.
What happens if something goes wrong?
Missing payments on a HELOC puts your home at risk, because it is secured by the property.
Common mistakes
- Budgeting from the interest-only payment.
- Using a variable-rate line for a long-term fixed need.
- Borrowing up to the limit without a repayment plan.
HELOC vs. Home Equity Loan
A revolving credit line, usually at a variable rate — borrow, repay, and re-borrow as needed during the draw period.
A one-time lump sum at a fixed rate, repaid in equal installments — predictable, but no flexibility to re-borrow.
Full comparison: HELOC vs Home Equity Loan, with a worked example →
HELOC: frequently asked questions
How does a HELOC payment work?
During the draw period you often pay only interest on the balance; afterwards you repay principal and interest over the repayment period, and the variable rate can change throughout.
Can a lender freeze my HELOC?
Yes, generally, if your home value drops significantly or your financial situation changes for the worse.
Is HELOC interest tax deductible?
It can be in some cases. Interest can be deductible when the money is used to buy, build or substantially improve the home that secures it, subject to IRS limits; ask a tax professional.
Related Terms
Where it fits
- Buying a home, Ownership: before this, Refinance; next, Appreciation.
More Financing Terms
Recommended next step
Decide between a line of credit and a lump-sum loan.
HELOC vs home equity loan →Sources and review
- What is the difference between a Home Equity Loan and a Home Equity Line of Credit (HELOC)?, Consumer Financial Protection Bureau. Supports: Draw and repayment periods, variable rates and lenders' ability to freeze or reduce a line.
- Publication 936, Home Mortgage Interest Deduction, Internal Revenue Service. Supports: When home equity interest can be deductible.
Where this applies: United States. Federal disclosure and servicing rules (TILA/Regulation Z, RESPA/Regulation X) apply nationwide; loan-program rules come from Fannie Mae, Freddie Mac, FHA, VA, USDA or the lender.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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