HELOC

What Is It

A home equity line of credit (HELOC) is a revolving, open-end line of credit secured by the equity in your home. Per the CFPB, you can draw against it, repay what you've drawn, and draw again up to your credit limit during a “draw period” — typically around 10 years. Once that ends, you enter a separate “repayment period” on a further, lender-set term, during which you can no longer borrow from the line.

Why It Matters

What most people don't expect is how that repayment period can actually work. Some lenders amortize the remaining balance gradually over the new term, but depending on the agreement, others require the entire outstanding balance repaid as soon as the repayment period begins — not a gradual payoff at all. That distinction is worth confirming in your loan documents well before the draw period ends.

Because a HELOC is secured by the home itself, missing payments carries the same risk as any mortgage: foreclosure on an asset that did nothing wrong other than back the loan. The lender can also freeze or reduce your available credit if your home's value declines significantly, even if every payment has been made on time and in full — the line of credit reflects the home's value, not just your payment history.

The tax treatment is also more limited than many borrowers assume. Since the 2017 Tax Cuts and Jobs Act, HELOC interest is deductible only when the funds are used to buy, build, or substantially improve the home securing the loan — not for debt consolidation, a car, tuition, or anything unrelated to that home. Per the IRS, the combined qualified residence debt limit for the deduction is $750,000 for loans taken out after December 15, 2017 ($375,000 filing separately); loans from before that date keep the prior $1 million ($500,000) limits regardless of how the funds are used. A HELOC's rate is also usually variable, tied to an index the same way a variable-rate loan is — see Fixed vs. Variable Rate Loans for how that mechanic works.

Quick Example

A homeowner opens a HELOC and draws $25,000 to cover a few years of expenses unrelated to the house. Local home values then drop, and the lender freezes the line before the homeowner draws any more — even though every payment has been on time. When the draw period ends, the $25,000 balance still has to be repaid, and because the money wasn't used to buy, build, or improve the home, none of the interest on it qualifies for the mortgage-interest deduction.

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