A home equity line of credit lets you borrow against your home in stages, usually at a variable rate. Here is how the draw and repayment periods work, how the rate is set, and the risk that sits underneath.
A home equity line of credit, or HELOC, is a revolving line of credit secured by your home. You are approved for a maximum amount based on the equity you hold, and during an opening stretch called the draw period you can borrow, repay and borrow again, much like a credit card, up to that limit. The Consumer Financial Protection Bureau calls it an open end line of credit that lets you borrow repeatedly against your home equity. Because your house is the collateral, the stakes are higher than on an unsecured line.
The two phases: draw and repayment
A HELOC runs in two stages, and the shift between them is where borrowers get caught out.
The first is the draw period. The CFPB gives ten years as a common example. During it you can take money out up to your credit limit, pay some back, and draw again. Many plans let you make interest only payments in this phase, which keeps the monthly cost low but means you are paying nothing toward the principal. Others require payments that include some principal from the start.
The second is the repayment period, which the CFPB says often runs ten or twenty years. When it begins, the draw period is over: you can no longer borrow, and you must repay the outstanding balance. Monthly payments are often significantly higher now, because they cover principal and interest rather than interest alone. Some plans instead end the draw period with a single balloon payment, where the entire balance comes due at once. Knowing which structure your agreement uses is one of the most important things to check before you sign.
Why the rate can move
Most HELOCs carry a variable interest rate. As the CFPB puts it, HELOCs usually have a variable interest rate, so your payments may change from month to month. The rate is normally built as an index plus a margin: a widely used index is the United States prime rate, and the lender adds a fixed margin on top.
That matters because the prime rate tracks the Federal Reserve's policy rate. As of October 29, 2026, the bank prime loan rate stood at 7.00 percent, according to the Federal Reserve's H.15 release. A HELOC priced at prime plus a margin moves with prime. Federal law does require that a variable rate plan secured by your home carry a lifetime cap on how high the rate can go, so there is a ceiling, but within it your payment can increase. Some lenders offer an option to convert part of the balance to a fixed rate, usually at a higher starting rate.
“HELOCs usually have a variable interest rate, so your payments may change from month to month.”
If you want the mechanics of how the Fed's policy rate feeds through to the prime rate and then to what you pay, we explain it in the fed funds rate versus the prime rate.
HELOC, home equity loan, or cash out refinance
A HELOC is one of three common ways to borrow against a home, and they are not interchangeable.
A home equity loan hands you a lump sum up front at a usually fixed rate, which you repay on a set schedule. The CFPB describes it as borrowing money using the equity in your home as collateral, received as a single lump sum. It suits a one time, known cost. A HELOC, by contrast, is a flexible line you draw on over time, which suits spending that is spread out or uncertain, such as a staged renovation.
A cash out refinance is different again: it replaces your existing mortgage with a larger one and gives you the difference in cash. It changes the rate on your whole mortgage, not just the new borrowing, so it is a separate decision.
All three put your home on the line. That is the feature they share and the reason to treat them with more care than a credit card.
What a HELOC costs, and the risk underneath
Beyond interest, a HELOC can carry application fees, an appraisal fee, annual fees and, in some cases, early closure fees. Read the fee schedule in the credit agreement, not just the advertised rate.
The risk that sits under all of it is simple and serious. Because the loan is secured by your home, missing payments can ultimately put the house at risk. A HELOC is not free money unlocked from your walls; it is a debt with your home as the guarantee. How much you can borrow depends on your equity and on the lender's limit on combined loan to value, and on your credit score, which also shapes the margin you are offered.
Before you open one
Match the tool to the need. A HELOC earns its keep when you want flexible access to funds over several years and can handle a payment that may increase. If your cost is a single fixed amount, a home equity loan may fit better; if it is day to day spending, neither belongs on the house.
Whatever you choose, map the repayment period before the draw period ends. The step up from interest only to full repayment is the moment that surprises borrowers, and it is entirely predictable if you read the agreement first.
What to watch
Watch two dates and one number: when your draw period ends, when full repayment begins, and the margin your lender adds to the index. Those three settings, far more than the headline rate on the day you sign, decide what a HELOC will actually cost you over its life.
Frequently asked questions
What is a HELOC and how does it work?
A HELOC, or home equity line of credit, is a revolving line of credit secured by your home. You are approved for a limit based on your equity, and during a draw period, commonly about ten years, you can borrow, repay and borrow again up to that limit. After the draw period comes a repayment period, often ten or twenty years, when you can no longer borrow and must pay down the balance, usually at a higher monthly payment.
What is the draw period on a HELOC?
The draw period is the opening phase of a HELOC when you can take money out up to your credit limit, repay it and draw again. The CFPB gives ten years as a common length. Many plans let you make interest only payments during this phase, which keeps costs low but leaves the principal untouched, setting up a larger payment later.
Are HELOC interest rates fixed or variable?
Most HELOCs have a variable interest rate, so the payment can change over time. The rate is usually an index plus a lender margin, with the US prime rate a common index. As of October 29, 2026, the bank prime loan rate was 7.00 percent per the Federal Reserve. Federal law requires a lifetime rate cap on home secured variable plans, and some lenders let you convert part of the balance to a fixed rate.
What is the difference between a HELOC and a home equity loan?
A home equity loan gives you a lump sum up front, usually at a fixed rate, repaid on a set schedule, which suits a one time known cost. A HELOC is a revolving line you draw on as needed over the draw period, usually at a variable rate, which suits spending spread over time. Both use your home as collateral, so both carry the risk of losing the house if you cannot repay.
What happens when the HELOC draw period ends?
When the draw period ends you can no longer borrow, and the repayment period begins. You repay the outstanding balance, typically over ten or twenty years, with payments that now include principal as well as interest, so they are often significantly higher. Some plans instead require a single balloon payment of the whole balance. Check which applies before you sign.
Sources
What each one is, and whose it is.
- 1
What is a home equity line of credit (HELOC)?, Consumer Financial Protection Bureau
DocumentationIndependent of the vendor - 2
What is a home equity loan?, Consumer Financial Protection Bureau
DocumentationIndependent of the vendor - 3
Selected Interest Rates (H.15): Bank prime loan rate, Federal Reserve (October 29, 2026)
DocumentationIndependent of the vendor