Loan Products · May 25, 2025
What Is a Home Equity Line of Credit (HELOC)?
A HELOC is a revolving line of credit secured by your home equity. Here is how they work, what they cost, and when they make more sense than a cash-out refinance.
A Home Equity Line of Credit (HELOC) is one of the most flexible financial products available to homeowners. Here is everything you need to know.
How a HELOC Works
A HELOC is a revolving line of credit with your home equity as collateral — similar in structure to a credit card but typically at much lower rates. It has two phases:
Draw period (typically 10 years): You can borrow and repay freely up to your credit limit. During this period many HELOCs have interest-only minimum payments, though you can pay more.
Repayment period (typically 10-20 years): No new draws. Full principal and interest payments on the outstanding balance.
How Much Can You Borrow
HELOC lenders typically allow a Combined LTV (CLTV) of 80-90%. If your home is worth $400,000 and you owe $250,000, a lender allowing 85% CLTV would allow up to $90,000 on a HELOC.
Rate Structure
HELOCs have variable rates tied to the Prime Rate (which tracks the federal funds rate). When rates rise, your HELOC rate rises. When rates fall, your rate falls.
HELOC vs. Cash-Out Refinance
HELOC is better when: you need flexibility (phased expenses, uncertain amounts), you have a great first mortgage rate you do not want to disturb, or your need is short-term.
Cash-out refinance is better when: you need a large lump sum at a fixed rate and are comfortable replacing your first mortgage.
Important Warning
A HELOC is secured debt — your home is collateral. Defaulting on a HELOC can result in foreclosure.
HMS can connect you with HELOC lenders. For cash-out needs, call 309-222-8286.