Key Takeaways
- A HELOC lets you borrow against your home equity as needed, like a credit card secured by your house
- Current average HELOC rate: 7.25% (January 2026) – down from 9%+ in early 2024
- Most lenders require 15-20% equity remaining after borrowing, a 620+ credit score, and DTI under 43%
- HELOCs have two phases: a draw period (typically 10 years) and repayment period (typically 20 years)
- American homeowners have $17.1 trillion in home equity, with $11.5 trillion considered “tappable”
- Best uses: home improvements, debt consolidation, emergency fund backup – worst uses: vacations, cars, daily expenses
Table of Contents
- What Is a HELOC?
- How a HELOC Works: Draw Period vs. Repayment Period
- Current HELOC Rates (January 2026)
- Compare HELOC Rates From Top Lenders
- HELOC vs. Home Equity Loan: What’s the Difference?
- How to Qualify for a HELOC
- How Much Can You Borrow With a HELOC?
- Best Uses for a HELOC (And 3 to Avoid)
- Pros and Cons of HELOCs
- How to Get a HELOC: Step-by-Step
- HELOC Alternatives to Consider
- Frequently Asked Questions
What Is a HELOC?
A home equity line of credit (HELOC) is a revolving credit line that uses your home as collateral. Think of it as a credit card secured by your house – you’re approved for a maximum amount, and you can borrow as much or as little as you need, repay it, and borrow again.
The amount you can borrow depends on your home equity, which is the difference between your home’s current market value and what you owe on your mortgage. If your home is worth $400,000 and you owe $250,000, you have $150,000 in equity.
HELOCs have become increasingly popular in 2025-2026 because they allow homeowners to access their equity without refinancing their existing mortgage. This matters because many homeowners locked in ultra-low mortgage rates (3-4%) during 2020-2021 and don’t want to give them up by refinancing at today’s higher rates.
According to the Federal Reserve, American homeowners collectively hold approximately $35.8 trillion in home equity as of mid-2025. Of this, ICE Mortgage Technology reports that $11.5 trillion is considered “tappable” – meaning it can be borrowed while still maintaining a healthy 20% equity cushion in the home.
Quick HELOC Example
Let’s say you own a home worth $450,000 and owe $280,000 on your mortgage. You have $170,000 in equity. If your lender allows you to borrow up to 80% of your home’s value, your calculation looks like this:
$450,000 (home value) × 80% = $360,000 (maximum total debt allowed)
$360,000 – $280,000 (existing mortgage) = $80,000 (potential HELOC credit line)
You could be approved for up to $80,000. But here’s the key difference from a loan: you don’t have to take all $80,000 at once. You might draw $15,000 to renovate your kitchen, pay it back over two years, then draw $25,000 later for your kids’ college tuition. You only pay interest on what you actually borrow.
How a HELOC Works: Draw Period vs. Repayment Period
Understanding the two phases of a HELOC is critical because they dramatically affect your monthly payments.
The Draw Period (Typically 5-10 Years)
During the draw period, you can borrow from your credit line as needed. Most HELOCs require interest-only minimum payments during this phase, though you can pay more if you choose.
Example during draw period:
Credit line: $50,000
Amount borrowed: $30,000
Interest rate: 7.50%
Monthly interest-only payment: $187.50
This relatively low payment is appealing, but be aware: you’re not paying down the principal. The $30,000 balance remains until you start making principal payments.
The Repayment Period (Typically 10-20 Years)
Once the draw period ends, you enter the repayment period. You can no longer borrow additional funds, and your payments increase significantly because you’re now paying both principal and interest.
Example during repayment period:
Balance at end of draw period: $30,000
Interest rate: 7.50%
Repayment term: 20 years
Monthly principal + interest payment: $241.79
This payment is about 29% higher than the interest-only payment. If you had borrowed the full $50,000, your payment would jump from $312.50 (interest-only) to $402.98 (principal + interest) – a $90 increase that catches many borrowers off guard.
Variable Rates: What You Need to Know
Most HELOCs have variable interest rates tied to the prime rate. The prime rate is currently 6.75% (as of January 2026), and lenders add a margin (typically 0.5% to 2%) on top of that.
This means your rate – and your payment – can change. When the Federal Reserve raises or lowers interest rates, HELOC rates follow. In 2022-2023, HELOC rates climbed from around 5% to over 9% as the Fed raised rates. They’ve since come down following the Fed’s rate cuts in late 2025.
Some lenders offer fixed-rate HELOC options where you can convert all or part of your balance to a fixed rate. This provides payment predictability but usually comes with a slightly higher rate.
Current HELOC Rates (January 2026)
HELOC rates have dropped significantly from their 2023-2024 peaks, making now an attractive time to consider a home equity line of credit.
Average HELOC Rates Right Now
National average HELOC rate: 7.25% (according to Curinos data)
National average home equity loan rate: 7.56%
Current prime rate: 6.75%
Typical HELOC rate range: 6.00% to 9.00% (depending on credit, LTV, and lender)
These averages are based on borrowers with excellent credit (780+) and a combined loan-to-value ratio under 70%. Your rate may be higher if you have lower credit or are borrowing a larger percentage of your equity.
How HELOC Rates Are Calculated
Your HELOC rate is typically calculated as:
Prime Rate + Lender Margin = Your HELOC Rate
Example: 6.75% (prime) + 0.75% (margin) = 7.50% HELOC rate
The margin your lender charges depends on your creditworthiness, loan-to-value ratio, and the lender’s own pricing policies. Borrowers with excellent credit and lower LTV ratios get smaller margins.
Introductory Rates: Read the Fine Print
Many lenders advertise low introductory rates (sometimes as low as 5.99%) that last 6-12 months before converting to the standard variable rate. These promotional rates can be genuinely good deals, but make sure you understand what rate you’ll pay after the intro period ends.
According to Bankrate’s analysis, some lenders have recently pulled back promotional offers, causing rate jumps for borrowers who expected introductory pricing.
HELOC Rate Forecast for 2026
Most experts expect HELOC rates to remain relatively stable or decline slightly through 2026. The Federal Reserve cut rates three times in late 2025, bringing the prime rate down to 6.75%. The Fed’s next meeting is January 27-28, 2026, though markets are only pricing in an 18% chance of another cut at that meeting.
According to CBS News, experts predict HELOC rates will “hold steady” in early 2026, with meaningful drops more likely in the second half of the year if inflation continues to cool.
Compare HELOC Rates From Top Lenders
Shopping multiple lenders is essential for getting the best HELOC rate. Rates can vary by 1-2 percentage points or more between lenders for the same borrower profile.
When comparing HELOC offers, look beyond just the interest rate. Consider closing costs and fees (some HELOCs have zero closing costs), annual fees (some lenders charge $50-$100/year), minimum draw requirements (some require you to borrow a minimum amount initially), early termination fees (if you close the HELOC within 2-3 years), and whether the lender offers a fixed-rate conversion option.
HELOC vs. Home Equity Loan: What’s the Difference?
Both HELOCs and home equity loans let you borrow against your home’s equity, but they work very differently.
Home Equity Line of Credit (HELOC)
How you receive funds: Access as needed up to your credit limit, like a credit card
Interest rate: Variable (changes with prime rate), though some offer fixed-rate options
Monthly payment: Varies based on balance; often interest-only during draw period
Best for: Ongoing expenses, projects with uncertain costs, emergency fund backup
Current average rate: 7.25%
Home Equity Loan
How you receive funds: Lump sum upfront
Interest rate: Fixed for the life of the loan
Monthly payment: Fixed principal + interest payment
Best for: One-time expenses with known costs, debt consolidation, borrowers who want payment certainty
Current average rate: 7.56%
Which Should You Choose?
Choose a HELOC if: You’re not sure exactly how much you’ll need, you want flexibility to borrow and repay over time, you’re comfortable with variable rates, or you want access to funds for future emergencies without paying interest until you use them.
Choose a home equity loan if: You know exactly how much you need, you want predictable monthly payments, you’re concerned about rising interest rates, or you’re consolidating debt and want a clear payoff timeline.
For a detailed comparison including cash-out refinancing, see our guide: HELOC vs. Home Equity Loan vs. Cash-Out Refinance
How to Qualify for a HELOC
Lenders evaluate several factors when deciding whether to approve your HELOC application and what rate to offer.
Equity Requirements
Most lenders require you to have at least 15-20% equity in your home, and they’ll want you to keep at least 10-20% equity after borrowing. This is measured by your combined loan-to-value (CLTV) ratio.
CLTV calculation:
(Current mortgage balance + HELOC amount) ÷ Home value = CLTV
Example:
($250,000 mortgage + $50,000 HELOC) ÷ $400,000 home value = 75% CLTV
Most lenders cap CLTV at 80-85%, though some allow up to 90% for well-qualified borrowers.
Credit Score Requirements
Minimum credit score: 620 (some lenders require 680+)
Best rates: 740+ credit score
According to Bankrate, borrowers with credit scores below 680 may face significantly higher rates or may need to look for lenders specializing in less-than-perfect credit.
Your credit score affects not just approval but your rate. A borrower with a 780 score might get a rate 1-2% lower than someone with a 680 score – on a $50,000 balance, that’s $500-$1,000 more in interest annually.
Debt-to-Income Ratio (DTI)
Lenders want your total monthly debt payments (including the new HELOC payment) to be no more than 43-50% of your gross monthly income.
DTI calculation:
(All monthly debt payments ÷ Gross monthly income) × 100 = DTI%
Example:
Mortgage: $1,800. Car loan: $400. Credit cards: $200. Proposed HELOC payment: $300
Total monthly debt: $2,700
Gross monthly income: $7,500
DTI: $2,700 ÷ $7,500 = 36%
This 36% DTI would be well within most lenders’ guidelines.
Income and Employment
Lenders verify that you have stable income to make payments. You’ll typically need to provide recent pay stubs (last 30 days), W-2s or tax returns (last 2 years), and bank statements. Self-employed borrowers may need additional documentation including profit and loss statements and business tax returns.
Property Requirements
Your property must be your primary residence in most cases (some lenders offer HELOCs on second homes or investment properties), a single-family home, condo, or townhome (co-ops and manufactured homes may have limited options), and properly insured with adequate homeowners insurance.
The lender will also order an appraisal or use an automated valuation model (AVM) to confirm your home’s current market value.
How Much Can You Borrow With a HELOC?
The amount you can borrow depends on your home’s value, your existing mortgage balance, and the lender’s maximum CLTV limit.
HELOC Borrowing Calculator
Use this formula to estimate your potential credit line:
(Home Value × Maximum CLTV) – Mortgage Balance = Potential HELOC Amount
Example at 80% CLTV:
Home value: $500,000
Maximum CLTV: 80%
Current mortgage: $300,000
($500,000 × 0.80) – $300,000 = $100,000 potential HELOC
Borrowing Limits by Home Value
Here’s how much you could potentially borrow at different home values (assuming 80% CLTV and 60% existing mortgage):
$300,000 home: $60,000 HELOC (with $180,000 mortgage)
$400,000 home: $80,000 HELOC (with $240,000 mortgage)
$500,000 home: $100,000 HELOC (with $300,000 mortgage)
$600,000 home: $120,000 HELOC (with $360,000 mortgage)
$750,000 home: $150,000 HELOC (with $450,000 mortgage)
According to LendingTree data, the average home equity loan offer nationwide is $144,330 as of early 2025 – up nearly 39% from two years ago.
How Much Should You Actually Borrow?
Just because you can borrow $100,000 doesn’t mean you should. Consider borrowing only what you need for a specific purpose, keeping a cushion for emergencies, and whether you can comfortably afford the payments if rates rise 1-2%.
Calculate your potential monthly payment at different interest rate scenarios to stress-test your budget.
Best Uses for a HELOC (And 3 to Avoid)
How you use your HELOC can determine whether it’s a smart financial move or a costly mistake.
Best HELOC Uses
Home improvements that add value: Kitchen and bathroom renovations, energy efficiency upgrades, and adding living space typically return 50-80% of their cost in added home value. You’re essentially reinvesting in the asset that secures the loan.
Debt consolidation: If you’re paying 18-24% on credit cards, using a 7.25% HELOC to pay them off can save thousands in interest. On $30,000 of credit card debt, you’d save approximately $4,000-$5,000 per year in interest.
Emergency fund backup: Having an open HELOC provides access to funds in emergencies without paying interest until you actually need it. See our detailed guide: Using a HELOC as an Emergency Fund
Major necessary expenses: Medical bills, essential home repairs, or bridging short-term income gaps can be appropriate HELOC uses when the alternative is high-interest debt.
Education expenses: College tuition or career-enhancing education can be a reasonable use if the expected income increase justifies the borrowing.
Worst HELOC Uses (Avoid These)
Vacations and lifestyle expenses: Financing a vacation with your home equity means you’re still paying for that trip years later – and risking your home for a memory. Use cash or skip the trip.
Depreciating assets: Cars, boats, and electronics lose value immediately. Securing them with your home doesn’t make financial sense. Use traditional auto financing or save up.
Day-to-day expenses: If you’re using a HELOC to cover groceries, gas, or regular bills, you have a budget problem that borrowing won’t solve. Address the underlying issue first.
The Tax Deduction Question
HELOC interest may be tax-deductible if you use the funds to “buy, build, or substantially improve” your home, according to IRS Publication 936. Interest on funds used for debt consolidation, education, or other purposes is not deductible. Consult a tax professional for guidance specific to your situation.
Pros and Cons of HELOCs
HELOC Advantages
Lower rates than alternatives: At 7.25%, HELOCs cost significantly less than credit cards (21%+) or personal loans (12%+).
Flexibility: Borrow only what you need, when you need it. Pay interest only on what you use.
Keep your existing mortgage: Unlike cash-out refinancing, a HELOC doesn’t disturb your primary mortgage. If you have a 3.5% rate from 2021, you keep it.
Potential tax benefits: Interest may be deductible if used for home improvements.
Reusable credit: As you pay down the balance, that credit becomes available again during the draw period.
No cost until you borrow: Unlike a loan where you pay interest from day one, a HELOC costs nothing until you actually draw funds.
HELOC Disadvantages
Your home is collateral: If you can’t make payments, you could lose your home to foreclosure. This is the most significant risk.
Variable rates create uncertainty: Your payment can increase if the prime rate rises. In 2022-2023, borrowers saw rates jump from 5% to 9%.
Payment shock risk: When the draw period ends, payments can increase substantially as you begin paying principal.
Temptation to overborrow: Easy access to funds can lead to using equity for non-essential expenses.
Lenders can freeze or reduce your line: If home values drop or your financial situation changes, lenders can freeze your HELOC. This happened to many borrowers during the 2008-2009 financial crisis.
Fees: Some HELOCs have annual fees, early termination fees, or inactivity fees.
How to Get a HELOC: Step-by-Step
Step 1: Check Your Equity Position
Estimate your home’s current value using online tools like Zillow, Redfin, or your county assessor’s website. Subtract your mortgage balance to calculate your equity. You’ll generally need at least 15-20% equity to qualify.
Step 2: Review Your Credit
Pull your credit reports from AnnualCreditReport.com and check your credit score. If your score is below 680, consider improving it before applying to get better rates.
Step 3: Shop Multiple Lenders
Get quotes from at least 3-5 lenders including your current mortgage lender (may offer relationship discounts), local banks and credit unions (often competitive on HELOCs), and online lenders (may have streamlined processes). Compare APRs, not just interest rates, as APR includes fees.
Step 4: Gather Documentation
Most lenders require proof of income (pay stubs, W-2s, tax returns), proof of homeownership (mortgage statement, property deed), homeowners insurance declaration page, government-issued ID, and recent bank statements.
Step 5: Apply
Submit your application with your chosen lender. Many lenders offer online applications. Be prepared to explain how you plan to use the funds.
Step 6: Appraisal
The lender will order an appraisal or use an automated valuation model (AVM) to verify your home’s value. If your home appraises lower than expected, your credit line may be reduced.
Step 7: Underwriting and Approval
The lender reviews your application, verifies your information, and makes a credit decision. This typically takes 2-4 weeks.
Step 8: Closing
Review and sign closing documents. You may have a 3-day right of rescission (cooling-off period) before the HELOC becomes active.
Step 9: Access Your Funds
Once active, you can access funds via checks provided by the lender, online transfers to your bank account, or a dedicated HELOC debit card (some lenders).
HELOC Alternatives to Consider
A HELOC isn’t always the best option. Consider these alternatives:
Home Equity Loan
Better if: You need a lump sum and want fixed payments
Current average rate: 7.56%
Pros: Predictable payments, protection from rising rates
Cons: Less flexibility, pay interest on full amount from day one
Cash-Out Refinance
Better if: Your current mortgage rate is higher than today’s rates
Current average rate: 6.75% (refinance)
Pros: Single payment, potentially lower overall rate
Cons: Replaces your existing mortgage, higher closing costs (2-5% of loan)
Avoid if: You have a low-rate mortgage from 2020-2021
Home Equity Sharing (Hometap, Unlock, Point)
Better if: You want funds without monthly payments
How it works: Company invests in your home equity in exchange for a share of future appreciation
Pros: No monthly payments, no interest
Cons: Give up portion of future home value gains, must settle within 10-30 years
Personal Loan
Better if: You need less than $25,000 and don’t want to use your home as collateral
Current average rate: 12-13%
Pros: No home equity required, faster funding
Cons: Higher rate, shorter repayment term
0% APR Credit Card
Better if: You need a small amount ($5,000-$15,000) and can pay it off within 15-21 months
Pros: Zero interest during promo period
Cons: Rate jumps to 20%+ after promo ends, can hurt credit score if high utilization
Frequently Asked Questions
Most lenders require a minimum credit score of 620 to qualify for a HELOC, though many prefer 680 or higher. To get the best rates (currently around 7.25% or lower), you’ll typically need a score of 740 or above. Borrowers with scores between 620-679 may still qualify but will likely pay rates 1-2% higher than advertised averages. If your score is below 620, focus on improving it before applying, or consider lenders that specialize in less-than-perfect credit borrowers.
You typically need at least 15-20% equity in your home to qualify for a HELOC. After borrowing, most lenders require you to maintain at least 10-20% equity, meaning they cap your combined loan-to-value (CLTV) ratio at 80-90%. For example, if your home is worth $400,000 and you owe $300,000 on your mortgage (75% LTV), you have 25% equity. With an 80% CLTV cap, you could potentially borrow up to $20,000 through a HELOC.
A HELOC is a revolving line of credit with variable rates that lets you borrow as needed up to your limit, similar to a credit card. A home equity loan provides a lump sum upfront with a fixed interest rate and fixed monthly payments, similar to a second mortgage. Choose a HELOC for flexibility and ongoing access to funds; choose a home equity loan for predictable payments and a specific one-time expense. Current average rates are 7.25% for HELOCs and 7.56% for home equity loans.
Most HELOCs have variable interest rates tied to the prime rate (currently 6.75%). Your rate equals the prime rate plus a margin set by your lender (typically 0.5-2%). When the Federal Reserve raises or lowers rates, your HELOC rate adjusts accordingly. However, many lenders now offer fixed-rate HELOC options or the ability to convert all or part of your balance to a fixed rate. This provides payment predictability but usually comes with a slightly higher rate.
The HELOC application and approval process typically takes 2-6 weeks from application to funding. This includes application review (1-3 days), appraisal ordering and completion (1-2 weeks), underwriting and approval (1-2 weeks), and closing and funding (3-7 days, including a 3-day rescission period). Some online lenders advertise faster timelines, but traditional banks and credit unions usually need the full timeframe. Having your documentation ready can speed up the process.
Getting a HELOC with bad credit (below 620) is difficult but not impossible. Some lenders specialize in borrowers with lower credit scores, though you’ll pay significantly higher rates – potentially 10-12% or more compared to the 7.25% average. You may also face stricter equity requirements (needing 30%+ equity) and lower credit limits. Alternatives to consider include home equity loans (slightly easier to qualify for), home equity sharing agreements (no credit score minimum with some providers), or improving your credit score before applying.
You can use HELOC funds for virtually any purpose. The most common and financially sound uses include home improvements and renovations, debt consolidation (paying off high-interest credit cards), emergency expenses, education costs, and major necessary purchases. However, you should avoid using HELOC funds for vacations, daily living expenses, or depreciating assets like cars. Remember that your home is collateral – if you can’t repay the HELOC, you could lose your house.
HELOC interest may be tax-deductible if you use the funds to “buy, build, or substantially improve” your home, according to IRS rules. The limit is interest on up to $750,000 of combined mortgage and HELOC debt ($375,000 if married filing separately). Interest on HELOC funds used for other purposes – like debt consolidation, education, or personal expenses – is not deductible. Keep records of how you use the funds, and consult a tax professional for guidance specific to your situation.
When your HELOC draw period ends (typically after 5-10 years), you enter the repayment period. You can no longer borrow additional funds, and your payments increase because you’re now paying both principal and interest instead of interest-only. For example, if you owed $50,000 at 7.5% with interest-only payments of $312/month, your payment could jump to $403/month during a 20-year repayment period. Plan ahead for this payment increase, or consider refinancing before the draw period ends.
Yes, you can pay off your HELOC early without penalty in most cases. However, some HELOCs have early termination fees if you close the account within the first 2-3 years. These fees typically range from $300-$500. Check your HELOC agreement for specific terms. If you do pay off the balance early but want to keep the line open for future use, you can simply leave the account open with a zero balance – just watch for any annual or inactivity fees.
As of January 2026, the national average HELOC rate is 7.25%, according to Curinos data. However, rates vary widely based on your credit score, loan-to-value ratio, and lender. Borrowers with excellent credit (780+) and low LTV may qualify for rates around 6-6.5%, while those with lower credit scores may pay 9% or more. Introductory promotional rates can be as low as 5.99% for 6-12 months. The prime rate is currently 6.75%, and HELOC rates typically equal prime plus a margin of 0.5-2%.
Yes, lenders can freeze or reduce your HELOC credit line under certain circumstances. This can happen if your home value declines significantly, your credit score drops, you miss payments on other accounts, or the lender experiences financial stress (as happened during the 2008 financial crisis). If your line is frozen, you can’t borrow additional funds, but you’ll still need to repay what you’ve already borrowed. This is one reason to avoid relying solely on a HELOC as your emergency fund.
A HELOC can be a powerful financial tool for homeowners with substantial equity, providing flexible access to low-cost funds for home improvements, debt consolidation, or emergency needs. With rates now in the low-7% range and $11.5 trillion in tappable home equity nationwide, many homeowners are taking a fresh look at this option.
The key is using a HELOC responsibly – borrowing only what you need, for purposes that improve your financial position, and ensuring you can handle the payments even if rates rise.
Ready to explore your options? Compare rates from multiple lenders above, or use our mortgage calculator to see how different loan amounts affect your monthly payments.