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A HELOC, or Home Equity Line of Credit, is a revolving line of credit secured by the equity in your home. It operates similarly to a credit card: you are approved for a maximum credit limit, and you can draw funds up to that limit as needed. You only pay interest on the outstanding balance you have borrowed.

HELOCs consist of two phases. (1) The Draw Period (typically 5 to 10 years) during which you can withdraw money and usually make interest-only payments. (2) The Repayment Period (typically 10 to 20 years) during which you cannot borrow more funds, and you must make monthly amortizing payments of both principal and interest to pay off the outstanding balance.

Paying interest-only keeps your draw phase payments low, which is convenient. However, it does not reduce your principal balance. If you don't pay down principal early, your payments will rise significantly when the repayment period starts. Amortizing payments reduce your total borrowing costs over the life of the line.

Most HELOCs have variable rates indexed to a benchmark like the U.S. Prime Rate. If the index rate rises, your variable interest rate and monthly payments will increase. If rates drop, your payments decrease. Some lenders offer fixed-rate lock options on portions of your balance to hedge against rising interest rates.

A Home Equity Loan provides a fixed lump sum at closing with a fixed interest rate and fixed monthly payments over the term. A HELOC is a flexible revolving line of credit with variable interest rates. Home equity loans are ideal for one-time expenses with fixed costs, while HELOCs are better for ongoing or unpredictable costs.

A cash-out refinance replaces your existing primary mortgage with a larger mortgage and gives you the difference in cash. A HELOC is a separate second mortgage. If your current primary mortgage interest rate is very low, a HELOC allows you to keep that rate while accessing equity, avoiding refinancing the entire first mortgage at a higher interest rate.

Common fees include origination fees, appraisal fees to value your home, title search fees, closing costs, annual membership fees during the draw period (typically $50–$100), and transaction/inactivity fees. Always check the fee schedule to compute the true annual percentage rate (APR).

The primary risk is that your home serves as collateral. If you are unable to make payments, the lender can foreclose on your property. Other risks include payment shock when the repayment phase begins, interest rate hikes, and over-borrowing beyond your ability to repay.