A Beginner’s Guide to HELOCs
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Last updated on June 1, 2024
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✅ Fact checked
Edited by
✅ Fact checked
What is a HELOC?
A home equity line of credit — also known as a HELOC — is a way for homeowners to extract cash from the value of their homes. As you pay down your mortgage and the home’s value appreciates, the share of your home that you actually own (called your equity) grows relative to the portion that the lender owns (your mortgage debt). By converting some of your equity back into debt, you gain access to a line of credit that you can tap when you need it.
Current HELOC rates: what to expect
Most HELOC rates are indexed to a base rate called the prime rate, which is the lowest credit rate lenders are willing to offer to their most attractive borrowers. One very influential factor in this rate is the Federal Reserve, which meets every six weeks and votes to raise, lower or maintain the federal funds rate. This is a separate rate that causes the prime rate to shift accordingly, with the common formula being “federal funds rate + 3% = prime rate."
When the Fed raises the federal funds rate, the prime rate goes up, and HELOC rates follow. When the Fed cuts the federal funds rate, the prime rate goes down, and so do HELOC rates. The last Federal Reserve meeting ended on June 12, 2024, when central bankers voted to leave rates unchanged. The next meeting is July 30-31, 2024.
Lenders will consider your profile — including your credit score, debts, and income — and determine a margin to add to the prime rate, which becomes your rate offer. The stronger your borrower profile is, the lower this margin will be.
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Nerdy Tip
Your best HELOC rate offer will be the one with the lowest margin. For example, if a lender applies a margin of 1.45% to a prime rate of 7.5%, that borrower’s rate will be 8.95%.
Some lenders offer a negative introductory margin, so that your rate is below prime for a specific period.
Current prime rate | Prime rate last week | Prime rate in the past year — low | Prime rate in the past year — high |
|---|---|---|---|
8.50%. | 8.50%. | 8.0%. | 8.50%. |
Unless you go with a lender that offers a fixed-rate HELOC option, your rate will be variable and can change over time as the prime rate shifts. HELOCs are a long-term loan, and some borrowers choose to “lock” some or all of their balance in a fixed rate because they prefer having predictable payments. Not every lender offers a fixed-rate option.
Follow the ups and downs with NerdWallet's explanation of how the Fed affects mortgage and HELOC rates.
» MORE: HELOC calculator
How do I get the best HELOC rate?
Several factors affect your HELOC rate. Among them are the current prime rate, your credit score, your combined loan-to-value ratio (which represents the percentage of home equity that you want to borrow) and your debt-to-income ratio, which is the amount of existing debt that you have relative to your income.
Borrowers with credit scores north of 620 will generally qualify for lower rates. Typically, all of your debts combined — including housing costs — shouldn’t exceed 36% of your income in order to receive the best rate offers.
Many lenders will allow you to tap up to 80% of your equity, though some will let you borrow more.
Shopping around with multiple lenders will allow you to compare HELOC offers, which can give you further confidence that you’re getting the best possible rate. If you have an existing account with any banks or credit unions (including the lender that financed your original mortgage), this can be a good place to start your search — some offer rate discounts to their customers. You can expand your search using NerdWallet’s roundup of the best HELOC lenders.
» MORE: How to get a HELOC that’s right for you
How much does a HELOC cost?
Closing costs for a HELOC may amount to 2% to 5% of the total loan amount. You should also budget for any ongoing yearly fees.
Many lenders don’t charge closing costs at all, though some require that you keep the line open for a certain amount of time.
Once you have a HELOC, the costs vary, depending on the interest rate, the amount borrowed and whether the credit line is in the draw period or the repayment period.
During the draw period, you may borrow against the credit line. The minimum monthly payments during the draw period are usually interest-only, although you may repay principal if you wish. The draw period is often 10 years, but it may vary. During the repayment period (often 20 years), you pay the loan off. You may no longer borrow against the credit line, and the minimum monthly payments include principal and interest.
» MORE: Good reasons to get a HELOC
Pros and cons of HELOCs
The main advantage of a HELOC is its flexibility: You draw money only when you need it, and you pay interest only on that amount. Meanwhile, you can repay as much or as little of the principal as you want during the draw period. The main drawbacks have to do with variable rates and putting your home at risk.
Pros
You pay interest only on the amount you have borrowed: If you have a credit line limit of $50,000, and you've borrowed $10,000, you pay interest only on that smaller amount.
Interest-only payments during the draw period.
A flexible way to pay for recurring expenses, such as a series of home renovations or tuition payments.
Cons
A variable interest rate means that when the Fed raises the federal funds rate, your monthly payments may go up.
You could lose your home if you fail to repay.
» MORE: Ways to tap your home’s value
Learn more about HELOCs:
Understanding home equity lines of credit
HELOC calculator: how much could you borrow?
Best HELOC lenders
Check out our other mortgage and refinance tools
See how much your home is worth
Compare mortgage refinance rates
Frequently asked questions
What is the current interest rate on a HELOC?
HELOC rates are tied to the U.S. prime rate, which is published in the Wall Street Journal here. Lenders will add a margin to the prime rate to calculate your HELOC interest rate.
The prime rate can change for plenty of economic reasons, but it’s most likely to change every six weeks when the Federal Reserve meets to set monetary policy.
See AlsoHome Equity Loans | PennymacIs a HELOC a good idea right now?
Whether or not a HELOC makes sense for you depends on your goals. You take on risk when you borrow against your equity, as you could lose your home if you can’t make your payments. It’s a smarter move to use a HELOC for something that will reinvest in the home and grow your wealth, like putting on a new roof or installing central air. Expenses that aren’t worth this risk — such as a vacation or a wedding — aren’t typically a good use of HELOC funds.
Most HELOCs have a variable rate, so you’ll also want to make sure that you can afford to continue making payments even if the interest rate goes up.
Should I get a HELOC or home equity loan?
HELOCs often have variable rates, which change whenever the Fed raises or cuts short-term interest rates. Home equity loans almost always have fixed interest rates. A HELOC is a line of credit, and you pay interest only on the portion that you borrow. A home equity loan is a lump-sum loan, and you pay interest on the full amount.
A HELOC is well-suited for recurring expenses, such as a multistage renovation project, while a home equity loan is suitable for one-time expenses where you know exactly how much you’ll need.
» MORE: Home equity loans vs. HELOCs
How do I get a HELOC?
A HELOC requires you to provide some of the same documentation you gave when you got the mortgage to buy the home: at minimum, your Social Security number, proof of income and estimated home value. The lender will check your credit report.
After applying, you'll be given a stack of disclosures to read. Underwriting may take anywhere from hours to weeks, and then you'll close on the credit line, similar to closing on the purchase mortgage.
» MORE: Checklist of documents needed for a mortgage preapproval
How much HELOC can I get?
The amount that you can borrow with a HELOC depends on the amount of equity you have in your home, the value of your home, and your financial profile. You can find your estimated borrowing limit using NerdWallet’s HELOC calculator.
Is HELOC interest tax-deductible?
Sometimes. HELOC interest accrued from 2018 to 2025 is only tax-deductible if the borrower meets certain guidelines outlined by the Tax Cuts and Jobs Act of 2017, a short-term program set by the Trump administration. Under these conditions, HELOC interest is tax-deductible only if the lien was for a primary or secondary home and if the proceeds were used to buy, build or substantially improve the home.
About the author: Taylor Getler is a home and mortgages writer for NerdWallet. Her work has been featured in outlets such as MarketWatch, Yahoo Finance, MSN and Nasdaq. Taylor is enthusiastic about financial literacy and helping consumers make smart, informed choices with their money. Email: [emailprotected].
Article sources
NerdWallet writers are subject matter authorities who use primary, trustworthy sources to inform their work, including peer-reviewed studies, government websites, academic research and interviews with industry experts. All content is fact-checked for accuracy, timeliness and relevance. You can learn more about NerdWallet's high standards for journalism by reading our editorial guidelines.
Consumer Financial Protection Bureau. My lender offered me a Home Equity Line of Credit (HELOC). What is a HELOC?. Accessed Dec 21, 2023.
My Home by FreddieMac. How to Get the Best Interest Rate for Your Mortgage. Accessed Dec 21, 2023.
Federal Trade Commission Consumer Advice. Home Equity Loans and Home Equity Lines of Credit. Accessed Dec 21, 2023.
