Introduction

A home equity line of credit (HELOC) is a revolving line of credit secured by your home’s equity. Unlike a traditional loan that pays out a lump sum, a HELOC works more like a credit card where you can borrow up to a set limit, repay, and borrow again. Your home is the collateral.

Most HELOCs have two phases. During the draw period (often 10 years), you can access funds up to your limit and typically make interest-only payments on what you borrow. After that, the repayment period, often 20 years, begins. You can’t borrow more, and you repay principal and interest on the remaining balance.

For homeowners with substantial equity, a HELOC can provide access to funds at rates lower than credit cards or many personal loans. As of January 2026, HELOC rates average around 7.4% nationally. Because your home is at stake, it’s important to understand how the product works before you sign.

What Is a Home Equity Line of Credit?

Basic Definition

A HELOC is a second mortgage that lets you borrow against the equity in your home. While your primary mortgage financed the purchase, a HELOC turns the equity you’ve built into available credit.

How much you can borrow depends on your home’s current value, what you still owe on your mortgage, and the lender’s maximum loan-to-value (LTV) ratio. Many lenders allow borrowing up to 80% of the home’s value, minus the remaining mortgage balance, leaving an equity cushion that protects you and the lender if values drop.

How Equity Becomes Borrowing Power

Home equity is the difference between what your home is worth and what you owe. If your home is worth $400,000 and you owe $250,000, you have $150,000 in equity.

That doesn’t mean you can borrow the full $150,000. Lenders typically cap total borrowing at 80-85% of the home’s value. In this example, 85% of $400,000 is $340,000. Subtract the $250,000 mortgage balance and the maximum HELOC would be $90,000.

This combined loan-to-value ratio (CLTV) sets your borrowing ceiling and typically requires you to keep about 15-20% equity in the home.

HELOC vs. Home Equity Loan

Both products tap home equity, but they work differently. A home equity loan provides a lump sum at a fixed rate, with principal and interest payments starting immediately, often over 10 to 20 years.

A HELOC provides a revolving line, usually with a variable rate. You can draw funds during the draw period, repay, and borrow again. This structure often fits expenses that unfold over time or are hard to estimate, such as staged renovations or ongoing education costs.

Rate structure is another difference. Home equity loans are typically fixed-rate, making payments more predictable. HELOCs are usually variable-rate and tied to the prime rate, so payments can change. As of early 2026, HELOC rates average about 7.4%, while home equity loan rates tend to run slightly higher but offer stability.

Both are second mortgages, meaning they leave your primary mortgage unchanged. Homeowners with other assets may also consider alternatives such as crypto-backed loans from providers like Arch, which allow borrowing against Bitcoin or cryptocurrency without selling assets or triggering tax consequences.

The Two Phases: Draw Period and Repayment Period

The Draw Period

The draw period is the first phase of a HELOC, often 10 years, though some lenders offer five to 15 years. During this time, you can borrow up to your limit using the access methods your lender provides (such as checks, transfers, a card, or an app).

Most lenders require payments only on the interest for what you’ve borrowed, not the full limit. If you have a $90,000 HELOC and draw $40,000, you pay interest only on $40,000. At a 7.5% annual rate, the monthly interest-only payment would be about $250.

Because the credit line revolves, paying down your balance restores available credit. Borrow $40,000 and repay $15,000, and you have $65,000 available again. This flexibility can help when costs and timelines are uncertain.

You can also pay principal during the draw period, even if it’s not required. Paying down principal reduces total interest and can reduce payment shock later.

The Repayment Period

After the draw period ends, the HELOC moves into the repayment period, often 20 years. You can no longer borrow, and payments shift to principal plus interest.

This transition often increases monthly payments. If you were paying $250 per month interest-only on a $40,000 balance, the payment could rise to $550 or more depending on the rate and term. For borrowers who drew heavily and made only minimum payments, payments can double or triple.

In rare cases, a HELOC may include a balloon payment provision, requiring the full balance at the end of the draw period. These are uncommon, but it’s worth confirming whether your HELOC includes one.

How HELOC Interest Rates Work

Variable Rate Structure

Most HELOCs have variable rates tied to an index, usually the prime rate published in places like the WSJ. Lenders add a margin, often 0.5% to 3%, based on factors like creditworthiness, loan size, and loan-to-value.

If prime is 7% and your margin is 0.5%, your HELOC rate is 7.5%. If prime drops to 6.5%, your rate becomes 7%. If prime rises, your rate rises.

Most HELOCs also include a floor (often around 3.25%) and a ceiling (typically 18% or lower), which limit how far the rate can move.

Because HELOC rates track broader interest-rate policy, borrowers should budget for potential increases, especially over a 10- or 20-year timeline.

Fixed-Rate Conversion Options

Some lenders let you lock a fixed rate on portions of your balance. This can improve budget predictability for larger draws. Not all lenders offer it, and fixed portions may carry slightly higher rates than the variable balance.

Rate Comparison Context

HELOC rates are generally lower than credit card rates (often 18% to 25%+) and can be lower than many personal loans (often 8% to 15%). However, HELOC rates are typically higher than primary mortgage rates because they’re second liens.

Using a HELOC to consolidate high-interest debt can reduce interest costs, but it converts unsecured debt into debt secured by your home.

Qualifying for a HELOC

Credit Score Requirements

Many lenders require a credit score between 620 and 680, though standards vary. Some prefer 700+.

Your score affects pricing as well as approval. A borrower with a 760 score may qualify for a rate 1.5 to 2 percentage points lower than someone with a 640 score, which can add up over time.

If your score is borderline, improving it before applying can help. Paying down revolving balances, making on time payments, and correcting credit-report errors can raise your score. HELOC applications involve hard inquiries, which can temporarily lower your score.

Home Equity Requirements

Most lenders require 15-20% equity after accounting for your first mortgage and the HELOC, which generally means a CLTV of 80-85% or less.

For a $500,000 home with a $350,000 mortgage, an 85% CLTV caps total borrowing at $425,000, leaving a maximum HELOC of $75,000.

Some lenders may allow higher CLTVs (up to 90% or 95%) for highly qualified borrowers, often with stricter requirements and higher rates.

Lenders determine home value through an appraisal or automated valuation model. If values have risen, you may qualify for a larger line; declining values can reduce borrowing capacity.

Income and Debt-to-Income Ratio

Lenders also assess your ability to repay using your debt-to-income ratio (DTI), or the share of gross monthly income going to debt payments.

To calculate DTI, total your monthly debt payments and divide by gross monthly income. If you earn $7,000 per month and pay $2,500 toward debts, your DTI is about 36%.

Many lenders prefer DTIs at 43% or lower, though some approve up to 50% for borrowers with strong credit and equity. Lenders also include an estimated HELOC payment in DTI calculations, even if you haven’t drawn funds yet.

Income verification often includes pay stubs, W-2s, and tax returns. Self-employed borrowers typically need two years of tax returns and may be asked for profit-and-loss statements and other documentation.

The HELOC Application Process

Required Documentation

Common requirements include government-issued ID, recent pay stubs (often the last two months), and one to two years of W-2s or tax returns. Self-employed borrowers typically need two years of tax returns plus current profit-and-loss statements.

Lenders may request mortgage statements, homeowners insurance details, and other documents depending on your situation (such as retirement statements, rental agreements, or legal documents tied to income).

Application Steps

Many HELOCs start with pre-qualification, usually involving a soft credit check and basic financial inputs. If you proceed, the formal application triggers a hard credit inquiry and requires full documentation.

The lender then confirms property value through an appraisal or automated valuation. Appraisals can cost $300 to $700, though some lenders cover the cost.

Underwriting reviews credit, income, debts, and value. This can take days to weeks. After approval, you receive a closing disclosure and sign final documents. A three-day rescission period typically applies, after which the HELOC becomes active.

From application to access, the process often takes two to seven weeks. Some lenders advertise faster timelines for straightforward cases.

Fees and Closing Costs

Costs vary by lender. Some charge no application fee. Potential costs include appraisal fees ($300 to $700), title search and insurance ($150 to $500), and occasional annual maintenance fees ($50 to $100). Inactivity fees exist but are uncommon.

Early closure penalties are worth watching. Some lenders charge $300 to $500 if you close the HELOC within two to three years. If you may pay it off quickly or refinance, review closure terms before signing.

Advantages of a HELOC

A HELOC’s main advantage is flexibility: you control when and how much you borrow and pay interest only on what you use. That can reduce interest costs for projects with uneven timelines or uncertain budgets.

Rates are typically lower than credit cards and many personal loans. During the draw period, interest-only payments can keep monthly costs lower.

Because the line revolves, repaid balances become available again, which can help with sequential expenses. A HELOC can also let homeowners tap equity without replacing an existing low-rate first mortgage.

Tax benefits may apply when funds are used for qualifying home improvements.

Disadvantages and Risks of a HELOC

Variable Rate Risk

Variable rates can make payments unpredictable. If rates rise, your monthly payment can rise with them.

Because broader economic policy influences HELOC rates, costs can increase even if your finances stay the same. Budgeting typically requires extra cushion for rate changes.

Your Home Is Collateral

If you can’t make payments, you could lose your home. That risk can feel sharper when the HELOC wasn’t used to buy the home.

As a second lien, a HELOC is paid after the first mortgage in a foreclosure, which increases lender risk and contributes to higher rates and stricter qualification.

If home values drop, you may lose your equity cushion, which can complicate selling or refinancing.

Payment Shock at Repayment Period

Payments often rise when you move from interest-only to principal-and-interest. Borrowers who draw heavily and make only minimum payments face the largest increases.

Because rates can also change, the transition can involve both a payment-structure shift and potential rate increases.

Overspending Temptation

A HELOC stays open for years, which can make it easy to borrow repeatedly. The low payment requirements during the draw period can obscure the long-term cost. Because the debt is secured by your home, overspending carries higher stakes than typical revolving credit.

Fees and Costs

“No closing costs” offers may still include early termination fees. Annual fees, inactivity fees, and appraisal costs may also apply depending on the lender and structure.

HELOC Alternatives to Consider

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a larger one and pays you the difference. You get one fixed-rate payment, but if your current mortgage rate is low, refinancing into today’s rates can raise your monthly payment.

Home Equity Loan (Second Mortgage)

A home equity loan provides a lump sum at a fixed rate with predictable payments. It can fit one-time, known-cost needs. Rates may run slightly higher than HELOCs, but payments are stable.

Personal Loans

Personal loans are unsecured and can fund quickly, but rates are often higher than home equity products. They may make sense for smaller amounts, faster funding needs, or borrowers who don’t want to use their home as collateral.

Alternative Collateral Options

Borrowers with other assets may have different borrowing tools available. For example, crypto-backed loans from providers like Arch can provide liquidity without selling crypto and triggering capital gains taxes. These products have different risks and qualification standards than home equity products.

Frequently Asked Questions

Can I get a HELOC with bad credit?

It’s possible but difficult. Many lenders set minimum scores above 650. Lower-score approvals often come with higher rates, smaller limits, and stricter terms.

If your score is marginal, stronger compensating factors such as high equity, low DTI, stable income may help. Improving your score before applying can also meaningfully change pricing.

How long does it take to get a HELOC?

Many HELOCs take two to seven weeks from application to access. Timing depends on appraisal scheduling, how quickly you provide documentation, lender volume, and underwriting complexity.

The three-day rescission period after closing is required and delays access to funds.

Can I pay off a HELOC early?

Most HELOCs allow early payoff. Paying down during the draw period typically carries no penalty and restores available credit. Closing the account early may trigger fees, often $300 to $500 if closed within two to three years.

Some borrowers keep the line open at a zero balance to avoid closure fees and maintain access, particularly if there’s no annual fee.

What happens if property values drop?

If values fall, lenders may reduce your credit limit to maintain required loan-to-value ratios, though this is uncommon and usually tied to significant declines.

Falling values can limit refinancing and make selling harder, but if you remain current on payments, the lender generally cannot call the loan due solely because the value declined.

Is HELOC interest tax-deductible?

Interest may be deductible if funds are used to “buy, build, or substantially improve” the home securing the loan. Using funds for other purposes typically does not qualify.

Rules changed significantly after 2017, and the deduction is subject to broader mortgage-interest limits. It’s helpful to keep documentation and consult a tax professional.

Can I have both a HELOC and home equity loan?

Yes, if your combined loan-to-value ratio stays within lender limits (often 80-85%). This increases payment complexity and requires careful budgeting. Some borrowers use a fixed-rate home equity loan for a known expense while keeping a HELOC available for emergencies.

Conclusion

A HELOC offers flexibility: you can borrow as needed, pay interest only on what you use, and keep your first mortgage in place. HELOCs can be far less expensive than credit cards or many personal loans, and the draw-period payment structure can help with cash flow.

However, it’s important to understand the tradeoffs. Rates can change, payments often rise sharply in repayment, and your home is collateral. The revolving access can also encourage overspending if you don’t have clear boundaries.

About Arch

Arch is building a next-gen wealth management platform for individuals holding alternative assets. Our flagship product is the crypto-backed loan, which allows you to securely and affordably borrow against your crypto. We also offer access to bank-grade custody, trading and staking services.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Cryptocurrency investments are volatile and risky. Always conduct your own research before making investment decisions.