A Home Equity Line of Credit (HELOC) is a revolving credit line secured by your home's equity. It works like a credit card: you have a maximum credit limit, you draw only what you need, and you pay interest only on the amount you've drawn — not the full credit line. HELOCs have two phases: a draw period (typically 10 years) where you can borrow and make interest-only payments, and a repayment period (typically 20 years) where you repay principal plus interest.
| Feature | HELOC | Home Equity Loan | Cash-Out Refinance |
|---|---|---|---|
| Structure | Revolving credit line | Lump sum, fixed rate | New first mortgage |
| Rate Type | Variable (usually) | Fixed | Fixed or ARM |
| Rate | Prime + margin (8-10%) | Fixed (7-9%) | Market mortgage rates |
| Effect on Existing Mortgage | None — keeps current rate | None — keeps current rate | Replaces entire mortgage |
| Best For | Ongoing projects, emergency fund | One-time expense, debt consolidation | Lowering rate + cash out |
| Closing Costs | Low ($0-$1,000) | Low ($500-$2,000) | High (2-5% of loan) |
If you have a mortgage rate below 4-5% from refinancing during the low-rate era, a cash-out refinance would replace that rate with today's 6-7% rates — destroying your low-rate advantage. A HELOC or home equity loan lets you access your equity without touching your first mortgage, preserving your historically low rate. This is the #1 reason HELOCs have surged in popularity: homeowners are "rate-locked" into low-rate first mortgages and use second-lien products to access equity.
| Requirement | Typical Standard |
|---|---|
| Credit Score | 660+ (some lenders go to 620; best rates at 740+) |
| Combined LTV (CLTV) | Max 80-90%. CLTV = (first mortgage + HELOC) ÷ home value |
| Debt-to-Income | Max 43% DTI |
| Income Verification | Required (pay stubs, W-2s, tax returns) |
| Property Type | Primary residence (some lenders allow second homes/investment) |
HELOC interest is tax-deductible only if the funds are used to "buy, build, or substantially improve" the home securing the loan. If you use a HELOC for debt consolidation, college tuition, or a vacation, the interest is not deductible. The deduction is limited to interest on the first $750,000 of combined mortgage debt ($375,000 if married filing separately). Always consult a tax professional.