What is a HELOC?

Jeff Ostrowski

Wed, May 20, 2026 at 1:12 PM EDT 15 min read

Key takeaways

• A home equity line of credit (HELOC) is a variable-rate form of financing that lets you cash in on the equity you have in your home.

• HELOCs are a revolving line of credit, similar to a credit card — you can borrow what you need, repay it, then borrow again, up to your limit, during a set draw period.

• HELOCs are often used to pay for home improvements, but the funds can go toward any expense.

A HELOC (home equity line of credit) is a revolving form of credit with a variable interest rate, similar to a credit card. The line of credit is tied to the equity in your home. You can borrow money from your home equity and repay funds on an as-needed basis during a specified period of time. After that, you’ll pay back the amount you borrowed in installments.

Your home is the collateral for the line of credit, which means falling behind on payments puts your home at risk of foreclosure.

Most borrowers use HELOCs to finance home improvements, but you can also use them to fund education, a business or a major purchase. Some people also use them as an emergency fund. While you can technically use cash from a HELOC however you want, the best uses will improve your financial picture by increasing your home value, income or overall wealth.

How does a HELOC work?

When you’re approved for a HELOC, you’ll receive a credit limit based on your available home equity. Borrowers can usually tap up to 80 percent of their home’s value — though some lenders allow as much as 85 or 90 percent — minus their outstanding mortgage balances.

During an initial draw period, you can spend the funds using dedicated checks, a draw debit card or online transfer — up to your limit. You’ll need to make monthly interest payments on the amount you borrow, but if you also pay back your HELOC balance, the funds will be replenished, and you can borrow them again — or keep your costs down in the repayment period. This draw period typically lasts 10 years.

After that, you’ll enter a repayment period, during which you’ll no longer be able to access funds and will instead need to repay any outstanding principal and interest. Most HELOC plans allow you to repay the remaining balance over a period of 10 years to 20 years. Some lenders also provide the option to refinance your HELOC.

How HELOC interest rates work

The interest rate on a HELOC is variable — that is, it changes periodically, moving up or down in accordance with benchmarks like the U.S. prime rate, an average derived from the amount individual banks charge their most creditworthy customers. The prime rate, in turn, is based on the federal funds rate, the rate that banks charge other banks for short-term loans.