What is a HELOC and How Does It Work?
Explore how a Home Equity Line of Credit works – and how it could support your financial goals.
As you make monthly mortgage payments—or as your home’s market value rises—you’re building equity. Home equity is the difference between your home’s current value and what you still owe on your mortgage. That equity isn’t just a number; it can be a powerful financial resource when used strategically.
According to the Federal Reserve Bank of New York's Q2 2025 Household Debt and Credit Report1, HELOC balances increased by $9 billion to $411 billion in outstanding balances. This increase shows that more and more homeowners are tapping into their home equity through home equity lines of credit (HELOC’s).
Let’s explore and understand the specifics of what a HELOC is and how it works to help you make an informed decision.
Key takeaways:
- A HELOC is a revolving line of credit that works like a credit card, allowing homeowners to borrow against their home equity as needed.
- Most HELOCs have variable interest rates, though some lenders offer fixed—rate options for more predictable payments.
- HELOCs can be a helpful option for homeowners looking to renovate, consolidate debt*, or cover unexpected expenses. Since your home serves as collateral, responsible borrowing is essential.
What is a Home Equity Line of Credit (HELOC)?
A Home Equity Line of Credit (HELOC) is a revolving line of credit that offers flexible access to funds and functions much like a credit card. You can borrow, repay, and borrow again up to your approved credit limit, making HELOCs a practical solution for ongoing or variable expenses such as home renovations, debt consolidation, or education costs. Now, because a HELOC uses your home as collateral, it’s considered a type of second mortgage. That means it’s tied to the equity you’ve built in your home and is separate from your primary mortgage. If you sell your home or refinance, your HELOC would typically need to be paid off along with your main mortgage.
How Does a HELOC Work?
While both a HELOC and a home equity loan allow you to borrow against your home’s equity, they work differently. A HELOC works by offering revolving credit with a variable interest rate—ideal for ongoing or unpredictable expenses. While a home equity loan provides a lump sum with a fixed—rate and consistent monthly payments, making it better suited for one—time costs.
Most HELOCs come with a variable interest rate, which means your rate and monthly payment may change over time based on fluctuations in the prime rate—a benchmark rate that’s influenced by decisions made by the Federal Reserve. Typically, a HELOC begins with a draw period. During the HELOC draw period, you can access funds and pay interest only on what you use. This is followed by the HELOC’s repayment period, where borrowing ends and you begin repaying both principal and interest.
HELOC Interest Rate Options
When it comes to HELOCs, interest rates aren’t a one—size—fits—all. Most come with variable rates, which means your rate and your monthly payment can rise or fall depending on market conditions. It’s flexible, but it can also be unpredictable.
Prefer something steadier? Some lenders offer a fixed—rate lock option, allowing you to lock in all or a portion of your balance at a consistent rate. When you choose to lock in a fixed—rate on a portion of your HELOC balance, that amount typically converts to principal and interest (P&I) payments, offering predictable monthly costs while beginning repayment on that segment.
Your interest rate directly affects your monthly payment, so it’s worth paying attention. Whether you choose variable or fixed, make sure it fits your budget and financial goals.
Common Uses of a HELOC
Wondering how to make the most of your home equity? A Home Equity Line of Credit (HELOC) offers flexible funding for everything from home renovations to emergency expenses. Discover the most common and strategic ways homeowners use HELOCs to improve their finances and invest in their future.
1. Home Improvements and Renovations
Your home deserves to grow with you. Whether it’s a kitchen upgrade, a new roof, or a backyard oasis, a HELOC can help turn your vision into reality. It’s flexible funding that’s there for you as your home—and your life—continues to change.
2. Debt Consolidation*
Juggling multiple payments? A HELOC can help simplify your finances by rolling higher—interest debts into one manageable monthly payment. It’s a smart move that could save you money and stress.
3. Large Purchases
Big purchases can come with big decisions—whether it’s furnishing a new home, buying appliances, or covering major life events like weddings or travel. A HELOC gives you the flexibility to fund what matters most, manage large expenses over time and on your terms.
4. Educational Expenses
Investing in education is investing in your future—whether it’s yours, your child’s, or your spouse’s. A HELOC can help cover tuition costs, books, or other school—related expenses without the restrictions of traditional student loans.
5. Emergency Fund
Life can throw curveballs—a HELOC gives you a financial cushion when you need it the most. From unexpected medical bills to urgent repairs, it’s peace of mind with a built—in safety net. And when challenges arise, you won’t have to dip into your savings to stay afloat.
HELOC Considerations
A HELOC can be a powerful financial tool but like any tool, it works best when used wisely. One key risk? Since your home is the collateral, missed payments could put it at risk. And borrowing against your equity means you’re reducing the ownership stake in your home, which could impact future financial flexibility. Interest rates can fluctuate, especially with variable—rate HELOCs, so your monthly payment might not always stay the same. That’s why it’s important to borrow only what you need and have a plan to pay it back.
Quick tip: Think of your HELOC as a tool with purpose, not a pass to overspend. Set a clear plan for how you’ll use the funds and stick to it. Regular check—ins on your balance and budget can help you stay in control and make the most of your equity.
HELOC Requirements and How to Qualify
Wondering how to qualify for a HELOC? It starts with your home’s equity—the difference between what your home is worth and what you still owe. Most lenders look for at least 20% equity as a starting point.
From there, it’s about showing that you’re financially ready. Meeting common HELOC requirements—like having a strong credit score, steady income, and a low debt—to—income ratio—helps you stand out. Lenders also consider your momentum, your goals, and how this credit line fits into your overall financial strategy.
Want to make the process smoother? Gather the most common, necessary documents (such as recent pay stubs, mortgage statements, and personal identification) before you apply for a Home Equity Line of Credit. We’ll walk with you every step of the way—no finance degree required.
Apply for Home Equity Line of Credit Today
While it’s important to borrow responsibly and understand the risks, a HELOC can be a powerful way to tap into your home’s equity. With the right planning, its flexibility and accessibility can help you achieve your goals and fund the moments that matter most. Whether you’re planning a renovation, consolidating debt, or preparing for the unexpected—understanding how a HELOC works is the first step toward using it wisely.
Ready to put your equity to work? Explore how a HELOC can support your financial goals or apply for a Fifth Third Equity Flexline®(HELOC) today.
