What is a HELOC? How it works, and what happens after year 10

8 min read · LenderMatch Learn

A HELOC, or home equity line of credit, is a revolving credit line secured by your house. You get a credit limit based on your equity, borrow what you need when you need it, and pay interest only on the amount you have drawn. Most HELOCs have a variable rate and two phases: a draw period, when you can borrow and often pay interest only, and a repayment period, when you pay the balance down with principal and interest.

That second phase is where most surprises happen, so this guide shows the actual payment math at today's prime rate. It also covers how the rate is set, whether a HELOC counts as a second mortgage, and the honest pros and cons. Terms differ a lot from lender to lender, which is why it pays to compare several offers before you pick one.

How does a HELOC work?

A HELOC works like a credit card that uses your home as collateral. The CFPB describes it as a loan "that allows you to borrow, spend, and repay as you go." A typical line works like this:

1. You apply and get a credit limit. The lender values your home, subtracts what you owe, and applies its own maximum. Our guide to how much equity you can borrow walks through that formula.
2. You pay up-front costs, if any. Some lenders waive them; others charge for an appraisal, an application and closing (CFPB).
3. You draw money during the draw period. You can borrow up to your limit, repay, and borrow again. Some plans set a minimum amount per draw or require an initial draw at closing.
4. You repay during the repayment period. The line closes to new borrowing and you pay off what you owe.

The CFPB's plain warning: if you fall behind or cannot repay on schedule, you could lose your home.

The HELOC draw period

The draw period is the window when the line is open for borrowing. The CFPB gives 10 years as a common example, and some lenders go longer: one national credit union, for instance, advertises a 20-year draw period followed by a 20-year repayment period. Lenders must disclose the plan's payment terms, so check both lengths in your paperwork.

You pay interest only on what you use: draw $20,000 from a $100,000 line and interest runs on $20,000. The CFPB says you typically draw with special checks or a card tied to the line.

Are HELOC payments interest only?

Often, during the draw period, but not always. The CFPB describes two common setups:

• Interest-only: your minimum payment covers only the interest, so the balance does not go down unless you pay extra.
• Interest plus some principal: your minimum payment includes a slice of principal, but typically not enough to pay the balance off by the end of the draw period.

Either way, a variable rate means your payment can change even if you never draw another dollar. And with interest-only payments, the full balance is still there when repayment begins.

The HELOC repayment period

When the draw period ends, you can no longer borrow. What happens next depends on your agreement. Many lenders set a schedule that repays the full balance over a fixed number of years: the CFPB says this is often 10 to 20 years. Other plans require the entire balance at once, which the CFPB calls a balloon payment. If you cannot pay a balloon, you would need to refinance it or find another loan, and failing that you could lose your home.

Repayment payments are usually higher than draw-period payments because you are now paying principal and interest on the whole balance over a fixed term. The CFPB says they are "often significantly higher." The example below shows by how much.

Example: draw period vs repayment period payments

This is an illustration, not a quote. It assumes an $80,000 balance and a rate of prime plus a 1.00% margin. The prime rate was 7.00% as of October 20, 2026 (Federal Reserve H.15). A 1.00% margin is an example only: actual margins vary by lender, credit and loan-to-value, and one large credit union listed HELOC margins from −0.50% to 3.00% on October 21, 2026. So the example rate is 7.00% + 1.00% = 8.00%.

How the numbers work: interest-only is $80,000 × 8.00% ÷ 12 = $533.33 a month. The repayment rows use a standard amortization formula for the same $80,000 at the same rate.

Three things stand out:

• The shorter the repayment period, the bigger the jump. On a 10-year repayment schedule, the payment almost doubles.
• Interest-only years do not shrink the balance. Ten years of $533 payments add up to $64,000 in interest, and you still owe the full $80,000.
• Rate changes hit right away. If prime rose one point, the same balance at 9.00% would cost $600 a month interest-only and $720 a month on a 20-year repayment. The Federal Reserve raised rates on September 16, 2026, and its next meeting is October 27-28.

Size your line with the home equity calculator, then ask each lender for both payments on your balance.

What is a HELOC interest rate based on?

Most HELOC rates are variable and have two parts, according to the CFPB:

• The index: a published benchmark rate. Common indexes include the U.S. prime rate and the Constant Maturity Treasury (CMT) rate.
• The margin: the extra percentage the lender adds on top. Your margin usually depends on your credit, how much of your home's value is borrowed against, and the property.

Some lenders offer a low introductory rate for a short period, such as six months. Some HELOCs let you convert part of your balance to a fixed rate, which the CFPB notes is typically higher than the variable rate but more predictable. When you compare offers, ask for the index, the margin, how often the rate adjusts, and the lifetime rate cap.

Is a HELOC a second mortgage?

Usually, yes. The CFPB defines a second mortgage, or junior lien, as a loan you take out using your house as collateral while you still have another loan secured by it. HELOCs and home equity loans are its main examples. "Second" refers to who gets paid first if the home is sold to cover debts: the first mortgage lender does, and the HELOC lender gets what is left. The CFPB notes that second mortgages often carry higher rates than first mortgages.

If your home is paid off, a HELOC is not a second mortgage. It is the only lien, so it sits in first position.

HELOC pros and cons

Pros

• You can borrow, repay and borrow again for years without applying again (CFPB).
• You pay interest only on what you draw, which suits costs that arrive in stages, like a renovation or tuition.
• Rates are usually lower than on credit cards, which the CFPB notes carry higher rates than loans secured by a home.
• You keep your first mortgage and its rate, unlike a cash-out refinance.
• Interest may be tax deductible if you use the money to buy, build or substantially improve the home (IRS Publication 936).

Cons

• Your home is the collateral. Falling behind could lead to foreclosure.
• The rate is usually variable, so payments can rise.
• Payments can jump when the draw period ends, or a balloon payment may come due.
• The lender may freeze or reduce your line if your home's value falls or your finances weaken (CFPB).
• There can be fees: appraisal, application, closing costs, annual fees, and early termination fees.
• You generally must pay the HELOC off in full when you sell the home.

HELOC vs home equity loan

Both borrow against your equity and both use your home as collateral. The difference is how the money arrives. A home equity loan pays one lump sum, usually at a fixed rate, with equal payments that pay off the whole loan. A HELOC is a line you draw from as needed, usually at a variable rate. If you need one known amount at once and want a steady payment, a home equity loan or a cash-out refinance may fit better. The CFPB's guide to second mortgages explains both types.

What do you need to qualify for a HELOC?

Lenders look at three things: how much equity you have, your credit, and your overall finances. Minimums differ. One large national bank, for example, states a FICO score of 660 or higher for its HELOC, and lenders generally price the best rates for higher scores and lower loan-to-value ratios. Because requirements vary, the same homeowner can see different limits, rates and fees from different lenders. The CFPB's HELOC booklet includes a worksheet for comparing three offers side by side.

If you live in Texas, the state constitution adds its own HELOC rules, including an 80% cap on all home-secured debt and a $4,000 minimum per draw. See our Texas HELOC guide.

Frequently asked questions

How does a HELOC work on a paid-off house?

The same way, except the line is the only loan on the home, so it sits in first position instead of second. With no mortgage to subtract, your credit limit is based on the lender's maximum percentage of the home's value. At an 80% limit on a $300,000 home with no mortgage, that is up to $240,000.

Can I pay off a HELOC early?

Usually yes, but read the fee section first. The CFPB lists early termination fees and prepayment penalties among the costs to compare between offers. Texas home equity loans, including HELOCs, may be paid early without a penalty under the state constitution.

Is HELOC interest tax deductible?

Sometimes. IRS Publication 936 (2025) says interest on a loan secured by your home is deductible only if the money is used to buy, build or substantially improve that home, within the overall mortgage debt limits. Interest on money used for other things, like paying off credit cards, is not deductible. A tax professional can confirm your case.

Can a lender freeze or lower my HELOC?

Yes, in some situations. The CFPB says HELOCs generally let the lender freeze or reduce your line if your home's value falls or your financial situation gets worse. If that happens, ask the lender why, check your credit reports for errors, and ask whether a new appraisal would be accepted.

Does LenderMatch check my credit?

No. LenderMatch never pulls your credit. A lender you choose may check it, with your permission, when you apply.

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