How HELOC Interest Rates Work
Most HELOCs have variable rates tied to the prime rate: your rate equals prime plus a margin set by the lender (often prime + 0.5% to prime + 2%). When the Federal Reserve moves rates, your payment moves with it. With prime near 8% in 2026, typical HELOC rates land between roughly 8.5% and 10%.
Interest accrues only on the amount you actually draw, not the full credit limit. During the draw period you usually pay interest only, which keeps payments low but doesn't reduce the balance.
HELOC vs Home Equity Loan: Key Differences
A HELOC is a revolving line of credit — borrow as needed, repay, borrow again. A home equity loan is a lump sum with fixed payments from day one. Choose a HELOC when your expenses are spread out (renovations in phases); choose a home equity loan when you need all the cash at once and want a fixed rate.
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| Payout | Revolving credit line | Lump sum |
| Rate | Usually variable | Usually fixed |
| Draw period | Yes (~10 yrs) | None |
The Draw Period vs Repayment Period Explained
The draw period (typically 10 years) is when you can access funds. Payments are often interest-only, so your balance may not shrink. The repayment period (typically 20 years) follows, during which you can no longer draw and must amortize the outstanding balance — usually causing a sharp payment increase.
Tax Implications of HELOC Interest
Under the Tax Cuts and Jobs Act, HELOC interest is deductible only if the funds are used to buy, build, or substantially improve the home that secures the loan. Using the line of credit for debt consolidation, education, or a vacation does not qualify, even though the loan is home-secured. Keep good records of how the money was spent.
HELOC Risks and How to Mitigate Them
- Your home is collateral. Missing payments can lead to foreclosure.
- Rates are variable. Budget for payment increases if rates rise; consider a fixed-rate option if available.
- Interest-only draw payments delay principal reduction — pay extra during the draw period to soften the repayment shock.
- Don't over-borrow. Keep your draw modest relative to your income and equity.