HELOC (Home Equity Line of Credit)

What is a HELOC?

A home equity line of credit (HELOC) turns the equity in a property into a revolving credit line, like a credit card secured by your house. During the draw period (typically 10 years) you can borrow up to your limit, repay, and borrow again, usually with interest-only minimum payments. Afterward, the line converts to a repayment period (often 20 years) where principal and interest are due on the outstanding balance.

Most lenders allow combined loan-to-value (your first mortgage plus the HELOC limit) up to 80% to 90% on a primary residence. Rates are variable, tied to the prime rate, so payments rise and fall with the Fed, a crucial difference from a fixed-rate cash-out refinance.

Real estate investors prize HELOCs as flexible acquisition capital: draw funds for a down payment or an all-cash purchase, then repay the line from a refinance or sale and reuse it for the next deal. Because you pay interest only on drawn amounts, an unused HELOC is nearly free standby capacity. The risks are equally real: the collateral is your home, variable rates can spike, and lenders can freeze or reduce lines when home values fall, which is exactly when you might want the money.

Worked example

Your home is worth $400,000 with a $220,000 mortgage. A lender approves a HELOC up to 85% combined LTV: $400,000 × 0.85 − $220,000 = $120,000 line. You draw $60,000 for a rental down payment; at 8.5% your interest-only payment is $425 per month until you repay the draw, after which the full line is available again.

Frequently asked questions

Is a HELOC better than a cash-out refinance?

They solve different problems. A HELOC keeps your existing first mortgage intact (valuable if you locked a low fixed rate), costs little until drawn, and offers reusable flexibility, but carries a variable rate. A cash-out refinance replaces the whole mortgage at a fixed rate and delivers a lump sum, ideal for one large, permanent need. Rule of thumb: recurring or uncertain needs favor the HELOC; a single large need with rates below your current mortgage favors the refi.

Can I get a HELOC on a rental property?

Yes, but the market is thinner. Fewer lenders offer investment-property HELOCs, and those that do typically cap combined LTV around 70% to 75%, charge rates 1% to 2% higher than primary-residence lines, and require stronger credit and reserves. Many investors instead open a large HELOC on their primary residence and deploy it toward rentals.