How Does a HELOC Work?
8 Min Read | Last updated: August 6, 2026
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
So you have the home equity to borrow against, but how does a HELOC work? Learn the basics of HELOCs and why they can be a smart financial strategy.
At-A-Glance
- A home equity line of credit (HELOC) is a revolving line of credit that uses your home as collateral, letting you borrow up to a set amount before repaying the principal and interest.
- If you qualify, HELOCs can be a more flexible, affordable alternative to other loan options, like home equity and personal loans or cash-out refinances.
- A HELOC could mean foreclosure if you default, but it can also help you substantially increase your home’s value or reach other big financial goals.
Maybe you’re considering a multi-phase renovation that will drastically upgrade your home. Perhaps you need to finance your child’s college tuition, or you’re ready to tackle medical costs for an ongoing treatment. Whatever the reason, a home equity line of credit (HELOC) could be an affordable strategy—not only to make ends meet, but to save more than your other options.
What Is a HELOC?
A HELOC is like one big secured credit card—the kind that you need to deposit money (collateral) into before you can use it. Except that the collateral for a HELOC isn’t just any old money, it’s your home equity, the portion of your house that you’ve already paid off. When you take out a HELOC, you get access to a well of funds that you can dip into as needed, and you only pay back what you take out plus interest.
How Does a HELOC Work?
Once you’re approved for a HELOC, you could have up to 85% of your home’s equity available as credit (roughly $85,000 for every $100,000 you own in the home, excluding fees).1 You can use as much of that money as you need during the HELOC’s draw period, typically 5-10 years.2 After the draw period ends, you start a repayment period—generally 20 years—for the amount you borrowed plus interest, and you can no longer use any of the money.3
Here are some other key HELOC elements:
- HELOCs Require You to Build Up Equity Beforehand
Most lenders need you to have built up 15%-20% of home equity to qualify.4
- HELOCs Don’t Automatically Replace Your First Mortgage
If you still have a primary mortgage when you take out the HELOC, you’ll have to continue making payments on it.
- HELOCs Can Be Paid Back Before the Repayment Period
You can borrow, repay, and borrow again throughout the draw period—but your payments typically only go toward interest until the official repayment period starts and factors in your principal.
- HELOCs May Have Variable Interest Rates
If so, your rates can fluctuate over time.
- HELOC Funds Can Be Used at Your Discretion
What you pull from your HELOC can go toward debt consolidation, repairs and renovations, college tuition, or even vacations—although experts strongly warn against using funds for unnecessary purchases.5
HELOC Advantages
HELOCs can be super attractive for their borrowing and repayment flexibility, but they also come with a slew of other advantages:
- Lower Interest Rates
Since lenders have so much collateral to take if you default, HELOCs tend to have lower interest rates compared to other, unsecured forms of credit (like credit cards or traditional mortgages).
- Lower Closing Costs Than Alternatives
Many HELOCs may have similar closing costs to mortgages and home equity loans, around 2%-5% of the principal borrowed. But often they don’t, and some routine mortgage costs, like title insurance, don’t factor in.6
- Tax Benefits If You Renovate
The interest you pay on borrowed funds can be written off when tax season rolls around—but only if you used the money to make large home improvements.8
Did you know?
Home equity loans are like HELOCs, but they provide a lump-sum cash advance in exchange for equity, rather than an open line of credit, and you repay that principal over a 5-30-year term, typically at a fixed rate.7
HELOC Disadvantages
Like all forms of debt, HELOCs can come with risks:
- Underwater Scenarios
When you owe more on your home than it’s worth, you’re considered underwater—and this can happen if your HELOC and mortgage balance combined outweigh your home’s value. When you’re underwater, selling or refinancing your home can become more complicated, and foreclosure can become more likely.
- Loss of Home Equity
If you can’t pay back your HELOC within the repayment period, the lender could foreclose on your home. In other cases, if you have to sell your house after taking out a HELOC, the proceeds may have to cover any remaining balance.
- Unpredictable Rates
Since HELOCs may have variable rates, you could end up paying much more in interest charges than you planned.
- Costly Fees
While HELOCs may not involve as many closing costs, lenders can charge high annual, transaction, inactivity, and early-payment fees.
Frequently Asked Questions
Not necessarily. HELOC lenders prefer you to have at least 15% equity built up in your home, but they also generally want to see a minimum credit score of 680, although 720 or above is ideal.9 They may also require a monthly debt-to-income (DTI) ratio of 43% or lower and income tax returns or W-2s that prove steady employment.10
Yes, but during the draw period, your monthly payments typically only go toward interest. During the repayment phase, you’ll make monthly payments that combine both the principal and interest.
There sure are, including cash-out refinancing (replacing your primary mortgage with a larger one and getting the difference in cash) and home equity loans, which let you borrow against your equity for a lump sum you repay monthly. Personal loans are another option, but they often have higher rates and shorter repayment terms.
The Takeaway
Taking out a HELOC may be a smart financial strategy for financing large-scale home improvement projects or making necessary major purchases. HELOCs might even mean lower interest rates and more borrowing flexibility than alternatives, but their interest rates can spike, and your home is at risk if you can’t make payments. Before opting for a HELOC, you can compare different HELOC products, research alternatives, and carefully review the terms and fees of each.
1,2,3,4,7,9,10 "What Is a Home Equity Line of Credit (HELOC)?," Experian
5 "What You Need to Know About HELOCs in 2026," Experian
6 "How Much Are Home Equity Loan Closing Costs?," Experian
8 "How to Use a HELOC to Pay Off Your Mortgage," Experian
Megan Doyle is a business technology writer and researcher whose work focuses on financial services and cross-cultural diversity and inclusion.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
Related Articles
8 Ways to Finance Home Improvements
See options for financing home improvements including a personal loan, home equity loan, home equity line of credit (HELOC), cash-out refinance, and credit cards.
How to Qualify for a Home Loan
Before approving you for a home loan, lenders may look at your income, assets, and credit score. These tips could boost your chances of getting a mortgage.
What Is Home Equity and How Can I Use It?
Unlock your home equity wisely. Explore its uses, benefits, and risks to make the best financial choice for you.
The material made available for you on this website, Credit Intel, is for informational purposes only and intended for U.S. residents and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
