Quick Answer
A HELOC lets you tap the equity in your home as a revolving credit line, similar to a credit card, rather than receiving one lump sum. Most HELOCs carry a variable rate, so your payment can change as rates move.
- Structure
- Revolving credit line, not a lump sum
- Security
- Secured by your home's equity
- Rate type
- Usually variable
- Draw period
- A set number of years to borrow, then a repayment period
How a HELOC Works
A HELOC typically has two phases: a draw period, when you can borrow against the line as needed and often make interest-only payments, followed by a repayment period, when you pay down both principal and interest. Your available credit is based on your equity and the lender's maximum combined loan-to-value limit.
Because the rate is usually variable, your monthly payment can rise or fall over time, which differs from a fixed-rate home equity loan that hands you one lump sum at a set rate.
Common Uses for a HELOC
Homeowners often use a HELOC for renovations, debt consolidation, or as a flexible financial cushion, since you only pay interest on what you actually draw. Some Central Indiana buyers and investors also use one to help fund a down payment on another property.
Because your home secures the line, missed payments put your property at risk, so it's worth borrowing only what fits comfortably in your budget.
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Frequently Asked Questions — Home equity line of credit (HELOC)
What's the difference between a HELOC and a home equity loan?
A HELOC is a revolving line you draw from as needed at a variable rate, while a home equity loan gives you one lump sum at a fixed rate.
Can I get a HELOC on a rental property, not just my primary home?
Many lenders offer HELOCs on primary residences, and some extend them to investment properties, though terms and requirements vary.
Does a HELOC affect my ability to qualify for other loans?
Yes. Lenders factor your HELOC balance and payment into your debt-to-income ratio when you apply for other financing.
Is the interest on a HELOC tax-deductible?
It may be in certain cases, such as when funds are used to improve the home securing the loan. Confirm your specific situation with a tax professional.