How does a HELOC work?

The credit line of your HELOC is based on how much equity you’ve built in your home and other factors. If you’re a homeowner who has years of mortgage payments behind you, you’ve likely built up a significant amount of equity. With a HELOC, you can use that equity as collateral to get a line of credit for home improvements, debt consolidation, educational expenses and more or for the peace of mind of knowing you have a readily accessible safety net for emergencies or unexpected expenses.

Draw period. You can spend against your line of credit for the first 10 years, known as the initial draw period. During that time, your payments will be interest-only and are based on only what you’ve borrowed (you don’t pay on your entire credit limit). As you pay down your balance, the amount you’ve paid off becomes available for use again.

Repayment period. After that 10-year draw period is the repayment period, which is typically 20 years. During the repayment period, you’ll pay both principal and interest, so your payments may be higher than during the draw phase.

Rates. HELOCs are issued at a variable rate of interest, meaning your interest rate can change over the life of your credit line. While your rate can change, there is a rate minimum, or floor, as well as a maximum rate cap over the life of your loan.