Home Equity Line of Credit · Draw Period · Repayment · 2025
A Home Equity Line of Credit (HELOC) is a revolving credit line secured by your home. Lenders typically allow you to borrow up to 85% of your home's value minus your mortgage balance. A HELOC has two phases: a draw period (usually 10 years) where you can borrow and pay interest only, followed by a repayment period (usually 20 years) where you pay back principal plus interest.
A home equity loan gives you a lump sum at a fixed rate — like a second mortgage. A HELOC is a revolving line of credit with a variable rate, like a credit card secured by your home. HELOCs offer more flexibility (borrow only what you need), while home equity loans provide payment predictability with a fixed rate.
HELOC interest is tax-deductible only if the funds are used to 'buy, build, or substantially improve' your home (per IRS rules post-2017 Tax Cuts and Jobs Act). Interest on HELOCs used for personal expenses (vacations, cars, debt consolidation) is NOT deductible. Consult a tax professional for your specific situation.
Most lenders require a minimum credit score of 620 for a HELOC, though scores of 700+ qualify for the best rates. Lenders also typically require: at least 15–20% home equity, a debt-to-income ratio below 43%, and documented income.
At the end of the draw period (typically 10 years), your HELOC enters repayment. You can no longer borrow from the line, and your monthly payment jumps significantly because you now pay both principal and interest over the remaining 20-year term. Review your loan terms carefully before the transition.
Almost every HELOC carries a variable rate tied to the Prime Rate, which moves in lockstep with the Federal Reserve's benchmark rate. Your calculator estimate above uses today's rate — but a HELOC drawn today can look very different two or three years into the draw period if rates move.
How the math shifts. A $50,000 balance at 8.5% costs about $354/month in interest-only payments. If the Fed raises rates by 1.5 percentage points over 18 months — not unusual historically — that same balance at 10% costs $417/month, a jump of roughly 18% with zero additional borrowing. Because HELOCs are interest-only during the draw period, every basis point of rate movement flows directly into your payment with no amortization to soften it.
Rate caps exist — read the fine print. Most HELOCs include a lifetime interest rate cap (commonly 18%) and sometimes a periodic cap limiting how much the rate can move at each adjustment. These caps rarely offer meaningful near-term protection — an 18% lifetime cap does nothing to stop a move from 8.5% to 11% — but they matter in a true rate-spike scenario and are worth comparing across lenders before signing.
Fixed-rate conversion options. Many lenders now let you lock a portion of your drawn balance into a fixed rate for a fee, converting that chunk into a fixed-rate installment loan within the HELOC. This is worth considering if you draw a large lump sum for a one-time expense (renovation, tuition) rather than using the line as ongoing flexible credit — it removes rate risk on the amount you convert.
Before drawing a large balance, stress-test your budget at 2–3 points above the current rate. If a rate increase of that size would strain your monthly cash flow, consider a smaller draw, a fixed-rate home equity loan instead, or a partial fixed-rate lock once you draw.