Quick answer
A HELOC is a revolving line of credit secured by your home. You draw what you need during a draw period — 10 years in the CFPB’s example — often paying only interest, then repay the balance over a repayment period that often runs up to 20 years. The rate is usually variable: an index such as the prime rate, now 7%, plus a margin. On a $40,000 balance at 8%, interest-only payments are about $267 a month, rising to about $335 when repayment starts.
Key facts
How a HELOC works
A home equity line of credit (HELOC) is a revolving credit line secured by your home. The lender approves a credit limit and you borrow what you need, when you need it; as you repay, the credit becomes available again. It works much like a credit card, except that your house is the collateral.
You pay interest only on what you have drawn, not on the whole limit, which suits costs that arrive in stages — a renovation paid in installments, tuition each semester. For a single, known amount, a fixed-rate home equity loan is often simpler.
| Draw period | Repayment period | |
|---|---|---|
| Length | Set by the plan — 10 years in the CFPB’s example | Set by the plan — often up to 20 years |
| Can you borrow? | Yes, up to the limit | No |
| Minimum payment | Often interest only | Principal and interest until paid off |
| Watch for | Rate changes | Some plans require the whole balance at once (a balloon) |
The switch from one phase to the other is where many borrowers get caught out — see HELOC draw and repayment periods.
How the interest rate is set
Most HELOCs have a variable rate made of two parts:
- Index — a published benchmark that moves with the market. The most common is the prime rate, 7% in the Federal Reserve’s latest release. Federal rules require the index to be outside the lender’s control and available to the public.
- Margin — the extra percentage the lender adds, fixed in your agreement. It depends on your credit, how much of the home’s value you borrow against and the lender’s pricing.
With prime at 7% and an example margin of 1 percentage point, the rate is 8%, and it moves when prime does. An introductory rate, if offered, is temporary. Every variable-rate loan secured by a home must state a maximum rate in the contract — ask what that cap is and whether you can lock part of the balance at a fixed rate.
Federal rules for home equity plans
HELOCs secured by a home are governed by Regulation Z, 12 CFR 1026.40 — the Truth in Lending Act rules for home equity plans.
| Rule | What it means for you |
|---|---|
| Disclosures with the application | The plan’s fees, rate formula, payment rules and maximum rate, plus the CFPB’s HELOC brochure — including a warning that you could lose your home if you default. |
| No nonrefundable fees yet | No one may charge a nonrefundable application fee until 3 business days after you receive those disclosures. |
| Refund if terms change | If a disclosed term changes before the plan opens and you decide not to go ahead, every fee you paid must be refunded. Normal index moves don’t count. |
| No changing the deal | After opening, the lender can’t change the terms except in narrow cases the rule lists. |
| Limits on calling the loan | The lender can demand the full balance early only for fraud or material misrepresentation, failure to repay as agreed, or action or inaction that harms its security in the home. |
When a lender can freeze or cut your line
A lender can stop further draws or lower your limit only during periods when a listed condition applies, including:
- the home’s value declines significantly below the appraised value used for the plan;
- the lender reasonably believes you can’t keep up payments because of a material change in your finances;
- you are in default of a material obligation in the agreement;
- government action prevents the lender from charging the agreed rate or weakens its lien;
- its regulator says further advances would be unsafe and unsound.
Under the official interpretation, a value drop is significant when it shrinks the original gap between your credit limit and your available equity by 50%. The lender must send written notice with the reasons within 3 business days, and restore the line once the condition ends — or tell you that you need to ask for reinstatement. Risks of borrowing against your home works through an example.
Your right to cancel
For a HELOC on your principal home, you have 3 business days after the plan opens to cancel for any reason. Saturdays count as business days; Sundays and federal holidays don’t. You must cancel in writing. The lender then has 20 days to return what you paid and release its lien, and it generally can’t release funds until the cancellation window has passed. If the lender never gave you the required notice or key disclosures, the right can last up to 3 years.
The right also applies when your credit limit is increased, but not to ordinary draws within the existing limit, and not to second homes or rentals. In Texas, the state constitution separately lets you rescind within 3 days and caps home equity borrowing at 80% of the home’s value — see the Texas guide.
A HELOC payment, worked out
$360,000 home (near the US median value), $180,000 mortgage, 80% combined limit, $40,000 drawn at 8%
| Monthly payment | |
|---|---|
| Draw period (10 years), interest only | $267 |
| Repayment period (20 years) | $335 |
| Draw period if prime rises 2 points | $333 |
| Repayment if prime rises 2 points | $386 |
Credit available: $360,000 × 80% − $180,000 = $108,000. If the rate never changed, the $40,000 would cost about $72,298 in interest across both periods — more than the amount borrowed, because no principal is repaid during the draw period. The 80% limit and the 1-point margin are examples; each lender sets its own.
HELOC or another way to borrow?
| HELOC | Home equity loan | Cash-out refinance | |
|---|---|---|---|
| How you get the money | Draw as needed | Lump sum | Lump sum |
| Rate | Usually variable | Usually fixed | Fixed or adjustable |
| Your first mortgage | Stays as it is | Stays as it is | Replaced by a larger loan |
| Upfront costs | Fees vary by lender | Closing costs | Refinance costs, typically 3%–6% of the loan |
If your mortgage rate is well below today’s 30-year average of 7.24%, a HELOC keeps it; a cash-out refinance gives it up on the whole balance — cash-out refinance vs HELOC runs the numbers. Either way, the interest is deductible only if the money buys, builds or substantially improves the home (home equity interest and taxes).
Frequently asked questions
How does a HELOC work?
The lender approves a credit limit secured by your home. During the draw period you borrow, repay and borrow again as needed, often paying only interest. When the draw period ends, you stop borrowing and repay the balance with interest, or pay it off in one sum if your plan has a balloon payment.
How is a HELOC rate calculated?
Usually as an index plus a margin. Most lenders use the prime rate, currently 7%, and add a margin set by your credit and the share of your home’s value you borrow against. Prime at 7% plus a 1-point margin gives 8%.
How long is a HELOC draw period?
Your agreement sets it. The CFPB uses 10 years as an example, with repayment periods often up to 20 years afterwards. Check both dates before you sign, because the payment can rise sharply when the draw period ends.
Is a HELOC a second mortgage?
Usually. If you still have a first mortgage, the HELOC is a second lien on the home. If you own the home outright, the HELOC can be the first and only lien. Either way, falling behind can lead to foreclosure.
Can a lender freeze my HELOC?
Yes, but only in situations federal rules allow — mainly a significant drop in the home’s value, a material change in your finances that makes repayment doubtful, or a default under the agreement. The lender must tell you in writing, with reasons, within 3 business days.
Can I cancel a HELOC after signing?
On your principal home, yes: you have 3 business days after the plan opens to cancel in writing for any reason, and the lender must refund your fees within 20 days. The right doesn’t apply to second homes or investment properties.
Sources
- Federal Reserve H.15 — Bank prime loan rate (Oct 28, 2026)
- CFPB — Example HELOC draw period (CFPB); HELOC repayment period, often up to (CFPB) (Aug 28, 2026)
- US Census Bureau, American Community Survey 2024 1-year — Median value of owner-occupied homes (2024 ACS 1-year)
- 12 CFR 1026.40(h) — No nonrefundable HELOC application fee until this long after you receive the disclosures and brochure (Oct 28, 2026)
- CFPB, Regulation Z official interpretation 1026.40(f)(3)(vi)-6 — HELOC freeze: a value drop that cuts the original gap between credit limit and available equity by this share counts as significant (Oct 28, 2026)
- 12 CFR 1026.9(c)(1)(iii) — Lender must send written notice of a HELOC freeze or credit-limit cut within (Oct 28, 2026)
- CFPB — Right to cancel a refinance or home equity loan on your principal home; After you cancel, the lender must return your money and release the lien within (Aug 8, 2024)
- 12 CFR 1026.15(a)(3) and 1026.23(a)(3) — Right to cancel lasts up to this long if the required notice or disclosures were not given (Oct 28, 2026)
- Texas Constitution, Art. XVI, Sec. 50(a)(6)(Q)(viii) — Texas: owner and spouse may rescind a home equity loan within this many days after it is made; Maximum combined loan-to-value for Texas home equity loans (Nov 7, 2017)
- Freddie Mac My Home — Typical refinance closing costs, low end (share of loan principal); Typical refinance closing costs, high end (share of loan principal) (Oct 28, 2026)
- Freddie Mac Primary Mortgage Market Survey — 30-year fixed rate, national weekly average (Week of Oct 29, 2026)
- CFPB: What you should know about home equity lines of credit (brochure)
- FTC: Home equity loans and home equity lines of credit
Last reviewed Figures are checked against the sources above. Read our editorial policy. This page is general information, not financial advice — see the disclaimer.