HELOC questions homeowners ask, answered

Key takeaways

Your home secures the line, so missed payments put the home at risk.
The limit depends on your home's value, what you owe, and your finances.
Your payment can change, both with the rate and when repayment starts.
Fees differ between lenders, so compare them in writing.

In this guide

What is a HELOC, in one minute?How does a lender set my limit?What will my payment look like?Can my rate go up?What fees should I expect?What can go wrong?Is a HELOC my only option?Can I change my mind after I sign?

What is a HELOC, in one minute?

HELOC stands for home equity line of credit. A lender gives you a credit limit based on the equity in your home. You take money from the line when you need it, and you owe interest only on what you have taken.

Equity is the part of your home you own outright: its value minus your mortgage balance. A HELOC is a second loan on the home, so your first mortgage stays in place.

How does a lender set my limit?

Most lenders start with a percentage of your home's value, then subtract what you already owe on it. The percentage varies by lender.

Example. Your home is valued at $350,000 and your mortgage balance is $180,000.

A lender with an 80% limit starts at $280,000. Subtract the $180,000 you owe and the line could be as high as $100,000.

These figures only show the math. They are not an offer. A lender also looks at your credit, your income, and your other debts.

What will my payment look like?

It depends on which stage the line is in.

During the draw period, often around 10 years, you can take money out. Many lines let you pay only the interest in these years, so the payment can look small.

During the repayment period, often 10 to 20 years, you can't take out any more and you pay down what you owe. If you were paying interest only, your payment can jump when this stage starts. Ask the lender to show you an example payment for both stages.

Can my rate go up?

On most HELOCs, yes. The rate is usually variable: an index, often the prime rate, plus the lender's margin. When the index rises, so does your rate.

Your agreement has to state the highest rate the line can reach. A low starting rate may last only a few months, so check what rate replaces it. Some lenders also let you fix the rate on part of your balance.

What fees should I expect?

Fees differ a lot between lenders, so ask for them in writing. Common ones are:

A home appraisal.
Closing costs, such as title and recording fees.
A yearly fee to keep the line open.
A fee if you close the line early.

If a lender offers no closing costs, ask whether you must repay them if you close the line within a set time.

What can go wrong?

You could lose your home. If you can't make the payments, the lender can foreclose.
Your payment could outgrow your budget. Rising rates and the start of repayment can both raise it.
The lender could cut your line. A lender may freeze or lower the limit if your home loses significant value or your finances change.
You could owe it all when you sell. The balance is normally paid off from the sale.

Is a HELOC my only option?

No. A home equity loan pays you one lump sum, usually at a fixed rate, and also leaves your mortgage in place. A cash-out refinance replaces your mortgage with a new, larger one and pays you the difference. A HELOC tends to suit costs that arrive over time, while the other two suit one known amount.

Can I change my mind after I sign?

Generally, yes, for a short time. If the line is secured by your main home, federal law usually gives you three business days after opening it to cancel without penalty. The lender must tell you about this right in writing and must return the fees you paid to open the line.

Get quotes from more than one lender, read each disclosure, and borrow only what you can pay back.

About this guide. This guide explains how HELOCs work in general terms. It doesn't rank or recommend any lender, and nothing in it is an offer of credit. Terms vary by lender. Read how we write our guides.