How does a HELOC work?

A home equity line of credit (HELOC) is when you use your home equity as leverage to take out new credit. Learn more about how to use these to your advantage.

Updated: September 20, 2023

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If you’re a homeowner and find yourself strapped for cash, you may be overlooking the funds right under your nose: the value stored within your property. If you need money to cover an emergency expense, do some remodeling, or manage other debts, you can use your home equity as leverage to take out new credit. This is called a Home Equity Line of Credit (HELOC). 

With a HELOC, you put your home up as collateral in exchange for a flexible, reliable source of funds. But how does a HELOC work? And how can you decide if it’s right for you?

What is a HELOC?

A home equity line of credit (HELOC) allows homeowners to borrow money using the equity they’ve built up in their home as collateral. It provides a revolving credit line (somewhat like a credit card) that can be used for various purposes such as home improvements, debt consolidation, or other large expenses. 

A HELOC can prove particularly advantageous for projects characterized by uncertain costs and timelines. For instance, consider a home renovation project where the final expenses might fluctuate based on unexpected structural discoveries. In a situation like that, a HELOC would allow you to access funds incrementally as needed, enabling you to manage evolving costs without taking on unnecessary debt upfront. 

How does a HELOC work? 

Qualifying for a HELOC

To qualify for a HELOC, you’ll need to meet certain criteria.

  • Minimum amount of equity: To qualify for a HELOC, you typically need to have a certain amount of equity in your home. Equity is the difference between your home’s current market value and the outstanding mortgage balance. While specific requirements vary between lenders, the general guideline ranges between 15 and 20%. The more equity you have in your home, the higher your chances of qualifying for a HELOC. Lenders will generally look at a metric called loan-to-value ratio (LTV ratio), which compares the amount you owe on your first mortgage to the home’s appraised value.

  • Credit score and financial situation: Lenders will also assess your creditworthiness, including your credit score and credit history. You may be more likely to qualify for a HELOC if you have a good credit score, typically above 620. Likewise, your application will be stronger if you can demonstrate responsible financial management, a history of on-time mortgage payments, and few other debts.

  • Income and debt-to-income ratio: Both your income and debt-to-income ratio — the percentage of your monthly income that goes towards paying your debt — will play a role in determining how much you can borrow through a HELOC. Lenders will want to see that your income is sufficient to cover your existing debts as well as additional HELOC payments. 

  • Home appraisal: Lenders may require a professional appraisal to assess the market value of your home. The lender will then calculate your credit limit based on that value and your current home equity. Most lenders will allow you to access up to 80% of the amount of equity you have in your home. 

The draw period

Once you qualify for a HELOC, you’ll be given a set credit limit and a time period during which you can withdraw funds. This is called the “draw period.” During this phase, you have the flexibility to borrow funds as needed, as with any other revolving line of credit. The draw period is what makes a HELOC different from other types of loans: it gives you the flexibility to borrow based on your changing needs rather than having to take out a specific amount or a single lump sum. While the draw period for each individual HELOC will depend on the terms of your loan and the lender’s policies, it should typically range from 5 to 10 years. 

While it may be tempting to borrow liberally during the draw period, it’s usually not advisable to rely on a HELOC for day-to-day expenses or speculative investing. Rather, it’s best to use the funds for expenses that are guaranteed to increase the value of your assets — like home renovations. 

Here are the key characteristics of the draw period: 

  • Access to funds: During the 10-year draw period, you can access funds from the HELOC up to your approved credit limit. 

  • Flexible borrowing: You have the flexibility to borrow funds multiple times within the draw period, making it suitable for ongoing or variable expenses. If you want, you can repay the funds via monthly installments during the draw period. This replenishes the available credit in your HELOC, allowing you to borrow again as needed. 

  • Interest-only payments: Typically, you’re required to make interest-only payments during the draw period. These minimum payments tend to be quite low, which makes borrowing extremely affordable until the draw period ends. 

  • Variable interest rate: Most HELOC interest rates are variable, which means your rate can change based on fluctuations in the market.

The repayment period

After the draw period ends, you’ll transition into the repayment period. During this phase, you’ll no longer be able to withdraw funds from your HELOC credit line. Instead, you’ll need to start making monthly payments on both the principal amount you borrowed and any interest that has accrued. 

Typically, the repayment period will span around 10 to 20 years, depending on the terms of your HELOC and the agreement you established with your lender. Here are the key characteristics of the repayment period: 

  • No more borrowing: The repayment period marks the end of the borrowing phase, meaning you can no longer access additional funds from your HELOC.

  • Regular monthly payments: During the repayment period, you’re required to make monthly payments on both your outstanding balance and any accrued interest. As you pay down the principal, your home equity increases. 

  • Fixed term: The repayment period has a fixed duration, often ranging from 10 to 20 years, depending on the terms of your HELOC agreement.

  • Amortization: Your repayments will follow an amortization schedule. In the beginning, most of each payment will go toward paying down interest charges. But over time, as you pay that interest off, more and more of each payment will go toward paying off the principal.  

Pros and cons of a HELOC 

Think a HELOC is right for you? Consider these pros and cons first.  


  1. Access to funds: For most people, a home is the most prized asset they own, but it can be hard to access its value. A HELOC allows them to do that. It can be helpful for big expenses like home renovations, education costs, or debt consolidation.

  2. Flexibility: Since you only pay interest and principal on what you withdraw, you can borrow as much or as little as you need. 

  3. Lower interest rates: Because they’re secured by your home, HELOCs generally have lower interest rates compared to other types of loans.

  4. Tax advantages: Depending on how you use it, a HELOC may offer tax advantages. The Tax Cuts and Jobs Act of 2017 changed the tax deductions offered by HELOCs, so it's important to consult with a tax professional to understand the specific tax implications.


  1. Variable interest rates: HELOCs often come with variable interest rates, meaning that the interest rates can fluctuate over time. This can result in higher costs if national rates increase.

  2. Fees: There may be upfront and ongoing fees associated with a HELOC, such as application fees, appraisal fees, or annual fees.

  3. Collateral risk: Your home serves as collateral for the HELOC, which means that if you are unable to repay the loan, you risk foreclosure or losing your home.

HELOC alternatives

  • Personal loans: A personal loan1 is a type of loan that you can borrow from a bank, credit union, or online lender. You can use this loan option for almost any purpose. Unlike a HELOC, a personal loan is usually unsecured, which means it doesn’t require any collateral. This also means that a personal loan will usually have a higher interest rate than a HELOC because the lender cannot recoup their losses if you fail to repay your loan. 

  • Home equity loans: Like a HELOC, a home equity loan is a type of second mortgage that allows homeowners to borrow money using the available equity they have in their home. Unlike a HELOC, a home equity loan is a lump-sum loan with a fixed interest rate and a set term (no draw and repayment period). 

  • Credit cards: If your expense is smaller and you expect to have the cash to get out of debt soon, a credit card can work. Look for a 0% introductory APR and make sure you pay off all your credit card debt before the interest rate skyrockets

  • Cash-out refinance: A cash-out refinance is a refinancing option where you replace your current mortgage with a new, higher home loan. The difference between the two loan amounts is paid out in cash. A cash-out refinance can be a good option if your home has appreciated in value and you need cash for a major expense. 

Compare loans with Navient Marketplace

If you feel uncertain about putting your home up as collateral for a HELOC, you may want to consider an unsecured personal loan to cover your upcoming expenses. Not sure where to get started? Navient Marketplace partners with Fiona, a leading personal loan search tool, to help borrowers find loans custom-tailored to their needs. Go to Navient Marketplace today to find and prequalify for flexible loans from the country’s top lenders.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Navient customers are invited to consider personal loan offers through our partner Fiona. Navient has not shared your information with Fiona and is not involved in the personal loan application process in any manner. All information is submitted directly to Fiona and any personal loan offers are made directly by participants in Fiona’s lending platform, powered by Even Financial. Even Financial, Inc. is the industry-leading embedded financial marketplace and independent subsidiary of MoneyLion Inc. (“MoneyLion”) (NYSE:ML). Checking your rate will not affect your credit score. Eligibility is not guaranteed and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions. 

Loan proceeds may not be used for postsecondary educational expenses, including refinancing federal or private student loans. 

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