How a HELOC works: draw period, repayment, and what moves your payment

So how does a home equity line of credit work? A lender approves you for a limit based on the equity in your home, your credit and your income. For a set number of years, the draw period, you can borrow against that limit, pay it back, and borrow again. You pay interest only on the balance you are carrying, and many programs let you pay just the interest during that stretch. When the draw period ends, the line closes and whatever you still owe is paid off in fixed monthly installments over the repayment period. The rate is variable, tied to the prime rate plus a margin, so your payment moves when prime moves. Your existing first mortgage is not touched. That is the whole product. The rest of this page is the detail that keeps you from being surprised.

What a home equity line of credit is

A HELOC, which stands for home equity line of credit, is a second mortgage that behaves like a credit card. It sits in second position behind your first mortgage and is secured by your home, which is why the rate is far below an unsecured card and why the lender takes it seriously if you stop paying.

Compared with a credit card, a HELOC has a much larger limit, a much lower rate, and a defined end date. A card revolves forever. A HELOC gives you a draw period and then a repayment period and is paid off at the end. The other difference is the collateral. A card is unsecured. A HELOC is your house.

Compared with a loan, a HELOC does not hand you the money up front. A home equity loan gives you one lump sum at closing, at a fixed rate, with a fixed payment, and you pay interest on the full amount from day one whether or not you have spent it. A HELOC gives you access instead of cash. If your limit is $100,000 and you have drawn $20,000, you pay interest on $20,000. The other $80,000 costs nothing to leave alone, apart from any annual fee the program charges.

That is the trade in one sentence. A loan gives you certainty on the payment. A line gives you flexibility on the amount. Our HELOC vs home equity loan vs cash-out refinance page compares all three on the same $80,000.

The two phases: draw period and repayment period

Every HELOC has two chapters, and the second one is the one people forget to read.

The draw period

The HELOC draw period is commonly 10 years. During it, the line is open. You can take money out by check, transfer or card depending on the program, pay it back, and take it out again up to your limit. Your minimum monthly payment is usually interest only on the balance you are carrying, which means it can be small, and if your balance is zero the payment is zero. Some programs require a small amount of principal with each payment. Either way, you are not obligated to pay the line down during the draw period, and that is where the comfort, and the trap, come from.

The repayment period

When the draw period ends, the line closes. No more draws. Whatever balance remains is converted into a fully amortizing loan, which means each payment now covers interest plus enough principal to reach zero by the end of the repayment period, commonly 10 to 20 years. If you paid interest only for the entire draw period and still owe most of what you borrowed, the payment steps up because you are now paying principal on a shorter clock. Here is what that looks like.

The calculator below lets you set your own balance, rate and periods. It shows the interest-only payment during the draw and the principal-and-interest payment after, so you see both chapters before you open the book. The rate is yours to enter. Nothing here is a quote.

Why the rate moves

Almost every HELOC has a variable rate built from two parts. The first is an index, nearly always the prime rate, which is the rate banks publish for their strongest borrowers. The second is a margin the lender adds on top, which is fixed for the life of the line and depends on your credit, your combined loan-to-value and the program. Your rate is prime plus the margin. If prime is 7.5% and your margin is 1%, your rate is 8.5%. When prime changes, your rate changes by the same amount, usually the next billing cycle.

Prime moves with the Federal Reserve. Banks set prime at a fixed spread above the federal funds rate, so when the Fed raises or cuts, prime follows within days and your HELOC payment follows the month after. That is the entire reason a HELOC payment went up so much between 2022 and 2023, and the reason it comes down when the Fed eases. Nobody can tell you where prime will be in year seven of your draw period. Plan for a range, not a number.

Two features limit the damage. Most HELOCs have a lifetime cap, a ceiling the rate cannot exceed no matter what prime does, and some have a floor, a rate it cannot drop below. Read both before you sign. Some programs also offer a fixed-rate draw option, which lets you convert part or all of your balance to a fixed rate for a set term. The converted portion then pays like a small home equity loan while the rest of the line stays variable and open. It is a useful tool if you draw a large amount and want to stop worrying about it.

What you can borrow

Lenders size a HELOC with combined loan-to-value, or CLTV. That is your first mortgage balance plus the new line limit, divided by your home's appraised value. Most programs cap CLTV around 80%. Some go to 90% for strong borrowers.

Say your home appraises at $650,000 and you owe $320,000 on the first mortgage. At 80% CLTV the total debt allowed is $520,000, so the line could be up to $200,000. At 90% it would be $585,000 total, or $265,000 on the line. Your credit and income also have to support the payment, so the CLTV number is a ceiling, not a promise. For the full method, including how lenders estimate value before an appraisal, see how to pull equity out of your home, or run your own numbers in the equity calculator.

What it costs to open

A HELOC is usually the cheapest of the equity products to set up, but it is not free. Expect some mix of the following, and ask for each by name.

• Appraisal or valuation. Many programs use an automated valuation or a drive-by appraisal instead of a full interior one, which keeps the cost down.
• Title and recording. The lender records a lien on your home and needs a title search to confirm its position. Smaller loans mean lighter title work.
• Origination or application fee. Some programs charge one, some do not.
• Annual fee. A yearly charge for keeping the line open, common on bank HELOCs.
• Early closure fee. Charged if you close the line, not just pay it to zero, within the first few years. This is how lenders recover costs they waived up front.
• Inactivity or minimum draw requirements. Some programs require a draw at closing or charge if the line goes unused.

Some lenders advertise no closing costs and recover them through the margin, the annual fee or the early closure fee. Nothing is wrong with that, as long as you know which one you are paying.

Who a HELOC fits and who it doesn't

A HELOC fits a homeowner who has a low-rate first mortgage worth keeping and needs money in pieces rather than all at once. A remodel paid in stages over 18 months. A rental down payment next year and repairs the year after. A standby reserve so that a job loss or a medical bill does not become a credit card balance at 24%. Anyone whose honest answer to "how much do you need" is "it depends" is describing a HELOC.

It does not fit people who want a payment they can write on the calendar and forget. It does not fit anyone who would draw the entire line on day one and carry it, because at that point you have a variable-rate loan with a payment cliff in year eleven, and a fixed-rate home equity loan does the same job with none of the uncertainty. And it does not fit anyone who treats available credit as money. If a $150,000 limit feels like $150,000 you have, pick a different product.

How to get one with us

Unified Home Loans brokers to wholesale lenders and also lends as a correspondent, so we can place a HELOC with the program that fits your equity, your credit and your property instead of offering one bank's version. Here is how it goes.

1. Check your equity. Use the equity calculator to estimate your available line at 80% and 90% CLTV. It takes a minute and asks for no contact information.
2. Talk through the fit. Call or text (916) 755-6080. We go over what you need the money for, when, and whether a line or a lump sum serves you better.
3. Apply and send documents. Income, assets, your current mortgage statement and homeowner's insurance. If you are self-employed and your returns understate your income, we talk about the bank statement option instead.
4. Valuation and underwriting. The lender orders the valuation, reviews credit and income, and issues an approval with your limit, margin and terms. Review the cap, the floor, the draw and repayment periods and any fees.
5. Sign and draw. After signing and a short rescission period required by law on a primary residence, the line opens and you can draw.

The rate watch below follows the prime rate that HELOCs are priced from, so you can see which way the wind is blowing before you decide.