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How Does a Home Equity Line of Credit Work?

Like a credit card, a HELOC is a revolving line of credit, which means that you only borrow what you need when you need it.

August 20, 2021

Looking to borrow large amounts of money to tackle a large purchase? A home equity line of credit (HELOC) may meet that financing need. 

Whether you’re finally building your dream kitchen or looking for ways to help fund your child’s higher education, a HELOC can come in handy. 

Let’s walk through: 

  • What is a home equity line of credit? 

  • How does a home equity line of credit work? 

  • How can you use one to your advantage? 

What is a home equity line of credit?

So, what is a home equity line of credit loan? A home equity loan line of credit is a type of credit that functions similarly to a credit card. 

Like a credit card, a HELOC is a revolving line of credit, which means that you only borrow what you need when you need it. You’ll have a credit limit and can draw from this limit either using a:

  • Credit card connected to the account  

  • Writing a check 

You only make payments on the amount you end up borrowing, which means you won’t have to pay interest on the full amount you’re allowed to borrow unless you utilize it all. 

How does a home equity line of credit work?

A HELOC is extended by a lender for an agreed-upon number of years in two stages. 

First, you’ll be allowed to borrow money and only have to make minimum monthly payments on the amount you borrow. This first period is usually around ten years. 

Once this borrowing period ends, you’ll enter the second period, which is when you can no longer borrow money and must work towards repaying the loan in full. This second period is usually spread out over 20 years. 

Your home will act as collateral for the HELOC. If your payments are late or you find yourself unable to make payments at all, your home is at risk. If you end up selling your home, you’ll need to be ready to pay off your HELOC at the same time. 

Benefits and drawbacks of a HELOC

Like any type of financial product, a HELOC comes with its own unique set of advantages and disadvantages. 


  • Generally have lower interest rates than credit cards or loans

  • Can have a fixed interest rate

  • You only pay interest on the money you spend

  • There is no limit on how you can spend the money

  • Some purchases qualify for tax benefits 

  • Introductory periods may come with discounted rates

  • Credit limit is often higher than credit cards


  • There may be a minimum withdrawal amount

  • How you can access the funds may be limited

  • A set withdrawal period limits when you can access further funds

  • Fees

  • Making late payments or missing payments can hurt credit score

  • Using your home as collateral can put your home at risk

How much can you qualify for? 

How much you can borrow from a HELOC is based on the equity you have in your home, as well as other factors such as your creditworthiness and how much outstanding debt you have. 

You may be able to qualify to borrow up to 85% of the appraised value of your home, subtracting the amount you owe on your mortgage. All lenders handle HELOCs differently, so you’ll want to confirm with your lender a minimum or maximum withdrawal requirement that you need to adhere to. 

Your HELOC will come with a draw period, aka a set time when you can withdraw money from your account. When this period ends, you won’t be able to borrow any more funds. However, you may be able to renew your credit line.

What can a HELOC be used for?

How you choose to spend your HELOC funds is up to you, but it’s fairly common for people to take out HELOCs to help cover the costs of the following ventures: 

Home repairs and renovations

If you have a necessary repair that you can’t wait to save up for, then a HELOC may come to the rescue. HELOCs are also commonly used to fund expensive home renovations so that homeowners can pay those projects off slowly over time instead of all at once.

Higher education costs

Because HELOCs can come with such reasonable interest rates, they may be the right choice for some to help cover high education costs. They can especially be useful when you need to bridge the gap between what student loans and gift aid won’t cover.

Consolidating debt

If you have multiple high-interest forms of debt, consolidating all that debt into one HELOC can help you access lower interest rates. Having just one monthly payment to manage can help make paying debt off less stressful. 

Alternatives to HELOCs 

Because a HELOC typically has lower interest rates than other forms of credit, this can be a very appealing borrowing option. However, it’s important to remember the stakes of a HELOC. If you default on your payments, you risk the lender foreclosing on your home. You’ll want to make sure you’re confident you’ll be able to make your HELOC payments before you pursue this option. If you’re considering other borrowing possibilities, here are a few that may be a good fit. 

Personal loans

If you have strong credit, a personal loan may be able to meet your needs just as well as a HELOC. While the interest rate may be a bit higher, for some, paying a little more in interest may be worth it to not have to put up collateral. 

Personal loans are often unsecured loans, so your house or other assets won’t be on the line if you don’t make your payments. Like a HELOC, you can use a personal loan to cover almost any expense of your choice, including consolidating debt. 

Credit cards

Credit cards can come with very high interest rates, which doesn’t make them ideal for borrowing large sums of money. However, credit cards also often come with introductory offers such as 0% APR for a set period of time that allow you to essentially borrow money for free. 

Just make sure you’re prepared to pay off the credit card before the introductory period ends and the interest rate shoots up. 

Personal line of credit

A personal line of credit functions similarly to a HELOC (if the HELOC was unsecured). Just like a HELOC, you can withdraw money as needed and will only pay interest on the funds you actually borrow. The process of withdrawing money varies by lender, but often you can use a card linked to the line of credit to make purchases. 

If you own property and have some equity in it, a HELOC can be a helpful way to cash in on its value, without selling the home. For some, putting their home up as collateral might not be the right fit, but for others looking to finance a rennovation or education, the HELOC could feel like home.

Want less debt so you can increase your odds of getting a larger HELOC? Tally can help you get out from under your credit card debt faster.