Quick Answer
A HELOC is a line of credit secured by your home. During the draw period, often around 10 years, you borrow what you need up to your limit. Then you repay the balance, often over 10 to 20 years. Most HELOCs have a variable rate, so your payment can change even if you don't borrow more.
How does the draw period work?
During the draw period you can borrow up to your credit limit, pay it down and borrow again. The CFPB gives 10 years as an example. Some plans let you pay only interest during this time, which means you pay nothing toward what you borrowed.
What happens when the draw period ends?
You can't borrow any more, and you start repaying the balance. The CFPB says lenders often set repayment over 10 or 20 years, and that monthly payments are often much higher once repayment begins.
Some plans don't spread repayment out at all. They ask for the whole balance at once when the draw period ends. That's called a balloon payment, and if you can't pay it, you could lose your home. Check your plan's terms before you sign.
Why can my payment change?
Most HELOCs have a variable rate made of two parts: an index, which moves with the market, and a margin the lender adds. When the index goes up, so does your payment, even if you don't borrow more. Some lenders start with a low introductory rate that rises later. Some let you lock part of the balance at a fixed rate, which is usually higher but predictable.
What does a HELOC cost to open?
The CFPB lists fees you may pay: an appraisal, an application fee that might not be refunded if you're turned down, and closing costs such as title, filing and attorney fees. Some plans also charge yearly or inactivity fees. If the lender changes the terms before the line opens, other than a change in a variable rate, you can walk away and get your fees back.
What are the risks?
Your home is the collateral. If you fall behind or can't repay on schedule, you could lose it. The lender can also freeze your line or lower your limit in certain cases, such as a big drop in your home's value. Borrow only what you need, and plan for a higher payment when repayment starts.
Common Questions
Can a lender freeze my HELOC?
In some cases, yes. Federal rules let a lender stop new draws or lower your limit if your home's value drops a lot, or if it reasonably believes your finances have changed for the worse so you can't repay. It can't do so for just any reason.
Do I have to pay off a HELOC when I sell my home?
Generally, yes. The CFPB says that if you sell your home, you're usually required to pay off the HELOC in full right away.
Can I make interest-only payments on a HELOC?
Some HELOCs allow interest-only payments during the draw period. That keeps the payment low, but you pay nothing toward the balance, so the payment goes up when repayment starts.
Sources
This guide is general information, not advice about your situation.