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What Is a HELOC and How Does It Work?

What Is a HELOC and How Does It Work?

Jenius Bank Team6/27/2025
A hand is outstretched above an illustration of a house. There are graphic illustrations of paper money and a dollar sign.
Home equity lines of credit allow you to access the equity in your home. Learn more about how these lines of credit could help you fund a project or goal. You don’t have to sell your home to use the equity in it. It is possible to access that equity by taking out a home equity line of credit or HELOC. Let’s take a deeper look at how these credit lines work.

Key Takeaways

  • Home equity lines of credit (HELOCs) are a type of revolving debt that you could use as needed to pay for whatever you need to buy.
  • HELOCs typically have variable rates, but many lenders let you lock in a rate for a set time for a fee.
  • HELOCs are secured by your home, and if you fail to repay what you borrow, your lender could use your home to settle your debt.

Start with the Basics: What Does it Mean to Have Equity in Your Home?

Think of equity as the amount of your home you actually own. Your equity is equal to the difference between your home’s current market value and the remaining balance on your mortgage. If you own your home outright, then your equity is equal to the current market value. If you do have a mortgage, then on the day you close on your home, your equity is your down payment. As you pay off the principal in your mortgage, you gradually build up more equity too. The average American homeowner has roughly $311,000 of equity in their home.1

What Is a Home Equity Line of Credit?

A home equity line of credit is a type of revolving debt that lets you borrow against the equity you have in your home. The amount of the credit line is usually a percentage of that equity balance, and like a mortgage, the line of credit is secured by your home.As long as you pay minimum required payments each month and the outstanding balance by the end of the HELOC’s term, you’re in good shape. But if you fail to repay what you owe, the lender may be able to take possession of your home and use it to settle your debt.

Home Equity Lines of Credit versus Home Equity Loans

HELOCs and home equity loans both let you borrow against your equity. HELOCs function much like credit cards. You’re able to draw from the available credit line until the end of the HELOC’s term. There are usually minimum payments, but the amounts are usually variable. The rates are typically variable as well.With a home equity loan, you receive a lump sum of money upfront when you’re approved. Generally, the rate and the payment amounts are fixed until the loan term is complete (and the loan is paid off).

How Home Equity Lines of Credit Work

Once you’re approved, you enter what’s called the draw period. During this period, you’re able to use the funds as you see fit, within the terms of the agreement. The length of the draw period depends on your lender’s terms, but most last for around ten years.2Generally, you follow one of two paths during the draw period: repay what you borrow as you go or choose to just make the minimum required payments. If you have an outstanding balance at the end of the draw period, then you would start a repayment period. During the repayment period, you must make payments on what you borrowed, as well as any accrued interest, and you won’t be able to use the line of credit for additional purchases.

How Much Can You Borrow?

Every lender has their own requirements, but commonly HELOCs amount to 80% of the home’s equity. Say you have equity valued at $300,000. You may be able to borrow $240,000 or 80% of the value of that equity.Keep in mind that you may not qualify for the full 80%. Lenders base their decision on your credit score, your debt-to-income (DTI) ratio, and other financial factors.

How to Get a HELOC

HELOCs are available at many banks, credit unions, and dedicated lenders. To apply for and receive a HELOC, consider the following:
  1. Shop around. Though you may be able to get a HELOC from your mortgage lender, it’s a good idea to shop around. Get quotes from several lenders and apply with the lender who offers you the most competitive rates and the amount you need.
  2. Familiarize yourself with the qualification requirements. Every lender has their own requirements in place. Before you apply, review those requirements in detail. Typically, lenders want to see that you have at least 20% equity in your home, a minimum credit score of 650, and a DTI of 36% or less.3
  3. Submit your application and supporting documents. Once you find a lender you’re comfortable with, you need to fill out the application and submit financial information, like your bank statements, mortgage documentation, proof of income, and other similar documents. Your lender will tell you what they need to process your application.
  4. Complete the home appraisal. Most lenders require an appraisal before issuing a HELOC. The appraisal helps them ensure that the home is worth at least what you’re borrowing.
  5. Sign the documents. Once the lender reaches a decision and agrees to issue you the HELOC, you need to sign the closing documents for the loan.

The Pros and Cons of HELOCs

HELOCs are a versatile financing option that could help you get the money you need when you need it. But, like all types of debt, they’re not the perfect solution for everyone. Before you apply, familiarize yourself with the benefits and downsides of using a HELOC.4

The Pros

Here are a few pros that HELOCs offer homeowners:
  • There are few restrictions on how you use the money. Most lenders allow you to use the money you borrow for almost any purpose. This gives you more flexibility in the types of purchases you could make. Use the HELOC to pay for home improvements, medical bills, college tuition for your kids, or anything else you need to cover.
  • HELOCS may have lower rates than other loans. HELOCs typically offer lower rates than other types of loans or lines of credit. This could save you money on interest over the HELOC’s term.
  • You could make interest-only payments upfront. With HELOCs, you’re typically allowed to make interest-only payments during the draw period. Those payments may be smaller than what you’d find with other loans.

The Cons

Here are a few of the cons you may experience when you take out a HELOC:
  • HELOCS have variable rates. Unlike many home equity loans or even personal loans, HELOCs often have variable rates that change with the market. When rates go up, the rate on your HELOC may increase too. Keep in mind that some lenders may let you lock in a rate for a set time, potentially saving you money.
  • It’s secured by your home. If you fail to repay what you borrow or default on your HELOC, you may risk losing your home. Your lender could take possession of your home to settle your debt.
  • You risk borrowing more than you could repay. HELOCs often come with high borrowing limits. This means you could end up borrowing more than you could reasonably afford to repay before the end of your HELOC’s term.

Should You Apply for a HELOC?

It’s always important to consider how borrowing money may impact your financial situation and ensure that you feel confident you can repay the debt before you apply.And if taking on a debt is feasible, but a HELOC doesn’t seem right for you, you may want to consider other avenues of financing.

Alternatives to HELOCs

If you’re not sure that a HELOC is the right fit for your needs and goals, you do have other options. Here are some you may want to consider:5
  • Personal loans: If you only need to borrow a relatively small amount, taking out a personal loan may be a good choice. You get money upfront and may qualify for a lower rate than you’d get with a credit card. Some people prefer personal loans because typically they are unsecured and don’t put your home at risk as collateral.
  • Home equity loans: If you like the idea of borrowing from your equity but want the predictability of fixed rates and payment amounts, a home equity loan may be your preference.
  • Cash-out refinances: When you refinance your current mortgage with a new and larger mortgage loan, an equity “cash out” is received for the difference. This could be appealing in low-rate environments as the new mortgage rate may be lower. But it’s important to note that this option increases the amount of your outstanding mortgage debt… something to consider for your long-term financial wellness.
If you’re unsure of which option is best for your needs, speak to your lender or your financial advisor to discuss your concerns. They may be able to help you choose an option that fits your unique situation.

Final Thoughts

HELOCs, could be a great way to access the equity you’ve built up in your home. Since the funds may be used throughout the draw period and typically come without restrictions on use, they’re a relatively flexible option for many homeowners. However, if you’re looking to borrow money to cover an upcoming vacation or an unexpected expense, borrowing against your home’s equity may not be the best option. Instead, you may want to consider a different financing option, like a personal loan, to met the shorter-term need.
Borrowing & CreditFinancial Wellness