A HELOC — home equity line of credit — is a revolving line of credit secured by your home. Instead of receiving a single lump sum, you get access to a credit limit and can borrow from it, repay, and borrow again, much like a credit card. Because the loan is secured by your home, the home is the collateral. This article explains the mechanics so you can understand how a HELOC behaves; it is not a suggestion to open one.
A HELOC is a second mortgage: it sits behind your existing first mortgage and leaves your current first-mortgage rate untouched.
A HELOC has two distinct phases.
The draw period. For a set number of years, you can withdraw funds up to your credit limit as you need them. During this phase, many HELOCs require only interest payments on the amount you have actually drawn — not the full limit. Because payments during the draw period may be interest-only, the principal balance does not necessarily go down during this time. You can also repay principal and re-borrow it, which is what makes the line “revolving.”
The repayment period. When the draw period ends, you can no longer withdraw. The outstanding balance converts to a repayment schedule over the remaining term, and payments now include both principal and interest. Because you are now paying down principal (often over a shorter remaining period), the monthly payment can jump significantly compared to the interest-only draw period. This “payment shock” at the end of the draw period is a well-documented feature the CFPB highlights.
The variable rate. Most HELOCs carry a variable interest rate, usually tied to a published index plus a margin. As the index moves, your rate — and therefore your payment — can rise or fall. Some lenders offer options to fix the rate on a portion of the balance. Because the rate is variable, the cost of a HELOC is not fixed for its life, and future payments cannot be known with certainty in advance.
Because a HELOC is flexible, it is often described as suited to ongoing or uncertain costs where you may not know the total amount up front. That flexibility comes with two trade-offs to understand clearly:
How large a line you may qualify for is limited by combined loan-to-value (CLTV) — the total of all loans against the home divided by its value. A home equity loan is the fixed-rate, lump-sum alternative to a HELOC.
A HELOC is a revolving, usually variable-rate line secured by your home, with an interest-only-friendly draw period followed by a principal-and-interest repayment period that can raise your payment. It offers flexibility for uncertain spending needs, but the payment is not fixed and the home is collateral. Understanding the draw-to-repayment shift and the variable rate is essential before deciding whether a HELOC fits — and whether tapping equity at all is right for you. The CFPB’s “What you should know about home equity lines of credit” booklet is the standard neutral reference.