A HELOC (Home Equity Line of Credit) is a revolving credit line secured by your home equity — like a credit card backed by your house. Here is how it works, what it costs, and when to use one.
A HELOC (Home Equity Line of Credit) is a revolving credit line secured by your home equity — like a credit card backed by your house. Here is how it works, what it costs, and when to use one.
HELOC — Key Facts
8.5%–10%
Variable (Prime + margin)
10 years
20 years
85–90%
620–680
How a HELOC Works
A HELOC has two phases: the draw period (typically 10 years) where you can borrow up to your credit limit and make interest-only payments, and the repayment period (typically 20 years) where you can no longer draw and must repay principal + interest. Total HELOC term: 30 years.
During the draw period, you pay interest only on the amount you've drawn — not the full credit line. If your HELOC limit is $100,000 but you've only drawn $30,000, you pay interest on $30,000.
HELOC Rate Calculation
HELOC rates = Prime rate + margin. Current Prime rate: 8.5%. Typical margin: 0–2%. Most qualified borrowers pay Prime + 0–1% = 8.5–9.5% currently. If Prime rises, your rate rises automatically — there's typically no rate cap.
HELOC vs Home Equity Loan vs Cash-Out Refi
HELOC: Flexible draws, variable rate, interest-only during draw period. Best for phased expenses or emergency access.
Home Equity Loan: Fixed rate, lump sum, predictable payment. Best for single defined expense.
Cash-Out Refi: Replaces first mortgage, usually lower rate. Best if your existing rate is higher than today's rates.
HELOC Requirements
20%+ equity in the home (CLTV of 80–85% max after HELOC)
Credit score 620+ (680+ for best terms)
DTI under 43–50%
2 years of stable income documentation
Frequently Asked Questions
Current HELOC rates range from 8.5%–10% for well-qualified borrowers, tied to the Prime rate (currently 8.5%) plus a lender margin. HELOCs are variable-rate products — your rate changes when Prime changes. Credit unions often offer better HELOC rates than large banks, sometimes 0.5–1% lower.
Yes — a HELOC is specifically designed to add a second lien on top of your existing mortgage. Your lender calculates the combined loan-to-value (CLTV) — your first mortgage + HELOC limit ÷ home value. Most lenders cap CLTV at 85–90%. Example: $200K first mortgage on a $400K home = 50% CLTV. You could potentially get a HELOC up to $140K (reaching 85% CLTV).
Disclaimer: Smart Mortgage Guide provides educational content only. We are not a licensed mortgage lender, broker, or financial advisor. Rates, limits, and program details are subject to change. Always consult with a licensed mortgage professional before making financial decisions.