How does a HELOC work — draw period vs. repayment?
A HELOC has two phases. Draw period (typically 5–15 years): your credit line is open, you can borrow up to the limit, and most lenders require interest-only minimum payments. Repayment period (typically 10–20 years): the credit line closes, and your outstanding balance converts to a fully amortizing loan. This often causes payment shock — a $60,000 balance with interest-only payments of $462/month becomes $543/month in repayment on a 20-year schedule.
What determines my HELOC credit limit?
HELOC limits are based on CLTV (Combined Loan-to-Value). Formula: (Home Value × Max CLTV%) − First Mortgage = HELOC Limit. Most lenders allow 80–90% CLTV. Example: $500,000 home × 85% = $425,000, minus $280,000 mortgage = $145,000 HELOC limit. You also need 15–20% equity remaining, 620+ credit score, and DTI typically under 43%.
HELOC vs. home equity loan — which should I choose?
Choose HELOC when: costs are ongoing or unpredictable (staged home renovation, medical bills), you may not need the full amount, you're comfortable with variable rates, or you want flexibility. Choose a home equity loan when: you need a specific lump sum, you want rate certainty (fixed for term), or rates are expected to rise. HELOCs have lower initial payments but carry variable rate risk.
What is the Prime Rate and how does it affect my HELOC?
The Prime Rate is the benchmark interest rate that U.S. banks use for short-term loans. It's directly tied to the Federal Reserve's federal funds rate — typically Prime = Fed Funds + 3%. As of March 2026, the Prime Rate is 7.50%. Your HELOC rate = Prime Rate + your margin (set at origination, typically 0.5–2.0%). When the Fed raises rates by 0.25%, your HELOC rate rises 0.25% and your payment increases accordingly.
Is HELOC interest tax deductible?
Yes — with the same condition as home equity loans: interest is deductible only if the funds are used to buy, build, or substantially improve the home that secures it. Using HELOC funds for debt consolidation, travel, or car purchases makes the interest non-deductible (per the Tax Cuts and Jobs Act 2017). Keep records of how you use HELOC funds. Consult a tax advisor for your specific situation.
What happens at the end of a HELOC draw period?
Three common outcomes: (1) Repayment — the balance converts to an amortizing loan for the repayment period (most common). Watch for payment shock. (2) Balloon payment — some older HELOCs require full balance repayment at draw period end. (3) Renewal — some lenders allow renewing the draw period. Review your HELOC terms now to know which applies. If you have a large balance and expect payment shock, refinancing into a fixed home equity loan before draw period ends is worth considering.