HELOCs Explained: How Home Equity Lines Work

A home equity line of credit (HELOC) is a revolving credit line secured by your home: you can borrow, repay and borrow again up to a limit during a draw period, then you pay it back over a repayment period. Rates are usually variable, so your payment can change even if you don't borrow more, and because your home is the collateral, falling behind can cost you the home.

Here is how each stage works, what it costs, how much you can usually borrow, and the special issues in New York City.

How a HELOC works, stage by stage

1. Application

   Disclosures, appraisal and approval

   The lender must give you disclosures on rates, fees and payment terms. In general it can’t charge a nonrefundable fee until three days after you receive them. Expect an appraisal and title work.

2. Day 1–3

   Right to cancel

   Under federal law you can cancel within three days after the account opens by notifying the lender in writing. The lender must return fees you paid, including application and appraisal fees.

3. Draw period

   Borrow as you need

   You draw with special checks or a card, up to your limit. Some plans require a minimum draw (the CFPB gives $300 as an example), a minimum balance, or an initial draw at closing. Many plans let you pay interest only.

4. Repayment period

   No more draws; pay it down

   The lender may set a schedule to repay the full balance, often over 10 to 20 years. Payments are often much higher than in the draw period. Some plans instead require the whole balance at once, a balloon payment.

5. Sale of the home

   Pay it off

   If you sell, you are generally required to pay off the HELOC in full right away.

The payment jump

The biggest surprise for many borrowers is the move from draw to repayment. Say you owe $80,000 at 8% and have paid interest only. Your draw-period payment is about $533 a month. If the remaining balance must be repaid over 20 years at the same rate, the payment becomes about $669, and over 10 years about $971. If rates rise, it goes higher still. Model yours with the HELOC payment calculator.

How the rate works

A variable HELOC rate has two parts: an index that moves with the market and a margin the lender adds. The CFPB names the U.S. prime rate and the Constant Maturity Treasury (CMT) rate as common indexes. If your index is prime and your margin is 1 percentage point, your rate is prime plus 1.

When you compare offers, ask about:

• Teaser rates. An introductory rate that is unusually low for a short period, such as six months. Ask what the rate becomes.
• Rate caps and floors. How high and how low the rate can go, and how often it adjusts.
• Fixed-rate conversion. Some HELOCs let you lock part of the balance at a fixed rate. It is usually higher than the variable rate but more predictable.

How much can you borrow?

Lenders usually lend up to a percentage of your home's appraised value, minus what you still owe on your mortgage. This is called the combined loan-to-value (CLTV) limit. Each lender sets its own, and it can depend on your credit, the property type and whether it is your main home. Here is the math with an assumed 80% CLTV cap:

Your income and debts still have to support the payment, so the approved line may be lower. Check your numbers with the home equity calculator and the debt-to-income calculator.

Fees to ask about

The CFPB lists these possible charges. Some lenders waive some of them; get them in writing for each offer.

The risks

• Your home is the collateral. If you can't repay, including a balloon payment, you could lose it.
• Payments can rise with the index, and jump again when repayment starts.
• The line can be frozen or cut. HELOCs generally let the lender freeze or reduce your line if your home's value falls or your finances get worse. Don't count on the full line as an emergency fund.
• Renting out your home may be prohibited under the line's terms. Read them before you list a room or the whole place.

Is HELOC interest tax deductible?

Only in some cases. IRS Publication 936 (for 2025 returns) says interest on a home equity loan or line is deductible only if the money is used to buy, build or substantially improve the home that secures it. Interest on money used for a car, tuition or credit card payoff isn't deductible as mortgage interest. The deductible debt also counts toward the overall limit of $750,000 of mortgage debt ($375,000 if married filing separately) for loans taken out after December 15, 2017. And you only benefit if you itemize. See mortgage interest deduction and confirm with a tax professional.

HELOCs on NYC co-ops

Co-op owners own shares and a proprietary lease, not real property, so a co-op HELOC isn't a recorded mortgage. The lender takes a security interest in your shares and files a UCC financing statement, which for co-ops is filed with the City Register. In practice you need:

• a lender that makes lines of credit secured by co-op shares, and not every HELOC lender does
• the co-op's cooperation, typically a recognition agreement signed by the managing agent
• room under any building cap on how much of an apartment's value can be financed

Co-op loans don't pay NYC mortgage recording tax, according to the Department of Finance, which helps on cost. Ask your managing agent for the building's rules before you apply. IRS rules treat co-op stock as a qualified home, so the same deduction rules apply. See co-op share loans vs mortgages.

HELOC or something else?

A HELOC fits ongoing or uncertain costs, such as a renovation paid in stages, when you can handle a variable payment. A fixed home equity loan fits one known amount. A cash-out refinance can make sense if current rates are no higher than your existing mortgage rate. Compare all three in HELOC vs home equity loan vs cash-out refinance.

General information, not financial or tax advice. Terms vary by lender; read your agreement and disclosures.