A home equity line of credit (HELOC) works more like a credit card than a traditional loan: you get a credit limit and borrow only what you need. What surprises many borrowers is how the payment changes over the life of the line. That comes down to two phases — the draw period and the repayment period.
The draw period
During the draw period you can borrow against the line, repay, and borrow again, up to your limit. Many lenders allow interest-only payments in this phase, which keeps the early payment lower. The trade-off is that interest-only payments don't reduce what you owe, so the full balance is still there when the draw period ends.
The repayment period
When the draw period ends, you typically can't borrow any more, and you start repaying the balance plus interest over a set number of years. Because you're now paying down principal too, the monthly payment can rise noticeably — sometimes called payment shock. Some HELOCs instead require the remaining balance to be paid in one large payment at the end, so it's worth checking which structure an offer uses.
Variable rates
Many HELOCs have a variable rate tied to a benchmark index plus a margin set by the lender. When the index moves, your rate and payment can move with it. Ask whether the line has a rate cap, how often the rate can adjust, and whether you can lock a fixed rate on part of your balance.
Your home is the collateral
A HELOC is secured by your home. If you can't make the payments, you could lose your home to foreclosure. Plan for the higher repayment-period payment and for rate increases, not just the payment you see in the first months.
Questions to ask before you open a line
- How long are the draw and repayment periods?
- Are draw-period payments interest-only, and what will the repayment-period payment look like?
- Is the rate variable, and are there caps?
- What fees apply — closing costs, annual fees, or an early-closure fee? Our guide on comparing offers by APR, fees and term can help.
- Can the lender freeze or reduce the line, and under what conditions?
If you're still deciding between a line of credit and a lump sum, see home equity loan vs. HELOC.
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