What is HELOC?

A Home Equity Line of Credit (HELOC) is an open-end, variable-rate revolving credit line secured by the equity in a borrower’s residential property. Functioning similarly to a credit card, a HELOC establishes a maximum borrowing limit based on the home's appraised value, allowing the homeowner to draw funds, repay the balance, and re-borrow as needed. Under the Truth in Lending Act (TILA), lenders are required to provide variable-rate disclosures at the time of application, including the CFPB's mandated 'What You Should Know About HELOCs' booklet. TILA also guarantees a three-business-day right of rescission on primary residences, allowing borrowers to cancel the credit line without penalty immediately after opening it.

A typical HELOC is structured in two distinct phases: a draw period and a repayment period. The draw period (typically 10 years) allows the borrower to access funds using checkbooks, credit cards, or direct transfers, and usually requires only interest payments on the outstanding balance. The subsequent repayment period (typically 15 to 20 years) closes the line to new draws and requires fully amortizing monthly payments of both principal and interest, which can cause significant 'payment shock' for borrowers unprepared for the transition. Because interest rates on HELOCs are variable, they fluctuate based on a benchmark index (usually the Wall Street Journal Prime Rate) plus a lender-defined margin. Additionally, lenders reserve the right to freeze or reduce a borrower's credit line if the home's market value declines substantially or if there is a material change in the borrower's credit profile.