HELOCs: A Flexible Credit Line With a Moving Rate

How a HELOC works: draw, then repay

The lender approves a credit limit based on your equity, typically keeping all loans on the home at or below about 80% of its value (some lenders go to 85% or 90%). During the draw period you borrow by transfer, check or card, repay, and borrow again, and you pay interest only on the balance you carry. Many plans require only interest during this stage.

When the draw period ends, the line closes to new borrowing and the repayment period begins. The CFPB says you may then repay over about 10 to 15 years, or, under some plans, owe the whole balance at once as a balloon payment. Read which one your plan uses before you sign.

Your rate follows the prime rate

A HELOC rate usually has two parts: an index, most often the US prime rate, and a margin the lender adds and keeps fixed. Federal Reserve data show the bank prime rate at 7.00% for October 2 to 8, 2026, so a plan priced at prime plus 0.5% charges 7.5% today. When the Fed moves its target rate, prime usually moves with it, and your rate follows at the next adjustment.

Federal rules require the index to be publicly available and outside the lender's control, so the lender can't raise your rate at will. In Bankrate's October 7, 2026 survey ($30,000 line, 700 FICO, 80% CLTV), the average was 7.33%, with offers from 3.99% to 11.85%.

• Introductory rates: a low starting rate may last only months. Ask what the rate becomes afterward and when.
• Caps and floors: check the lifetime maximum rate and any minimum rate the plan sets.
• Fixed-rate options: some lenders let you lock part of the balance at a fixed rate, sometimes for a fee.

The payment jump when the draw period ends

The bigger risk is often not the rate but the switch from interest-only to principal plus interest. Say you've drawn $50,000 at 7.5%:

The payment rises by about half on the switch, and by two-thirds if rates climb in the meantime. To soften it, pay some principal during the draw period, or set a target payoff date and check it in the amortization schedule.

Fees and closing costs

HELOCs usually cost less to open than home equity loans, and some lenders cover the closing costs. Read what that offer is tied to: often you must keep the line open for a few years or repay the costs.

• At opening: application fee, appraisal, title search, and attorney, preparation and filing fees. Closing costs on home equity products commonly run 1% to 5% of the amount.
• While it's open: some plans charge an annual fee (Bankrate found $5 to $250), transaction fees or a minimum draw.
• Early closure: some lenders charge a fee, up to about $500, if you close the line within the first few years.

For a line on your main home, federal law gives you three business days after opening to cancel in writing, and the lender must refund your fees.

When the lender can freeze or cut your line

Once the plan is open, the lender can't change its terms whenever it likes. Regulation Z lists the situations in which it may stop further draws or lower your limit, among them:

• Your home's value falls significantly below the value used to approve the line; a small dip isn't enough.
• Your finances change materially, so the lender reasonably believes you can't repay.
• You are in default of a material obligation under the agreement.
• Your rate reaches the plan's maximum, if the agreement says so.

A freeze doesn't cancel what you already owe; it only blocks new draws. Don't plan a project on money you haven't drawn yet: if values fall, the line can shrink just when you need it. If your line is frozen and the reason no longer applies, ask the lender to reinstate it.

Your house and your taxes

Because your home secures the line, the FTC warns that falling behind can lead to foreclosure. If a payment increase is coming that you can't meet, call the lender early; our page on hardship and forbearance covers what to ask.

HELOC interest is deductible only if you itemize and use the money to buy, build or substantially improve the home that secures it, within the $750,000 limit on total mortgage debt taken on after December 15, 2017. Interest on draws used for a car, tuition or credit cards isn't deductible, so keep project draws separate and save the receipts.

Before you open a HELOC

1. 1 Compare at least three plans on margin, index, introductory period, rate cap and floor, and not just today's rate. Our APR guide explains why a HELOC's APR leaves out some costs.
2. 2 Ask for the draw and repayment periods in writing, and whether the plan ends with a balloon payment.
3. 3 Work out the repayment-period payment at today's rate and at two points higher, and make sure both fit your budget.
4. 4 List every fee: closing costs, annual fee, inactivity fee and early-closure fee.
5. 5 Borrow for lasting value, such as a repair or improvement, rather than spending that recurs. For smaller jobs, a home improvement loan keeps your house out of it.

Common questions