What Is a HELOC?
A HELOC — Home Equity Line of Credit — is a revolving credit line secured by your home equity. Think of it like a credit card backed by your house: you're approved for a maximum credit limit, you draw funds as needed during a set draw period, and you only pay interest on the amount you've actually used.
Unlike a home equity loan or a cash-out refinance, a HELOC doesn't give you a lump sum. It gives you access to funds — which you can draw and repay repeatedly during the draw period. That flexibility makes it ideal for ongoing projects, unpredictable expenses, or anyone who wants a financial safety net without paying interest until they actually use it.
Second lien — your first mortgage stays intact
A HELOC is a second mortgage. It sits behind your existing first mortgage and doesn't touch it. Your current rate, payment, and term on your primary loan remain exactly as they are. This is the key advantage when your existing mortgage rate is low — you access equity without disturbing the first mortgage.
Draw Period & Repayment Period
A HELOC has two distinct phases. Understanding the difference — and what happens at the transition — is critical before you open one.
Draw Period — Typically 10 Years
During the draw period, you can borrow up to your credit limit at any time using checks, a card, or an online transfer. You're only required to make minimum payments — usually interest-only on what you've drawn. Many borrowers pay more than the minimum to reduce the principal, but it's not required. You can draw, repay, and draw again repeatedly throughout this phase.
Repayment Period — Typically 20 Years
When the draw period ends, the line closes — no more draws. Your outstanding balance becomes fully amortizing over the repayment period. Monthly payments increase significantly because you're now paying both principal and interest on a fixed schedule. If you borrowed $80,000 at 8% and the repayment period is 20 years, your new payment is approximately $669/month.
Payment shock at the transition
The jump from interest-only payments to full P&I at the end of the draw period can be significant. A $100,000 balance at 8.5% moving from interest-only ($708/month) to 20-year amortization ($868/month) is a 23% payment increase overnight. Plan for this transition — or consider paying down the principal during the draw period to reduce the repayment burden.
HELOC Requirements
HELOC qualification is similar to a mortgage — credit, income, equity, and DTI all factor in. The key metric unique to HELOCs is combined loan-to-value (CLTV): the total of all liens on the property divided by the home's value.
CLTV calculation example
Home value: $400,000. First mortgage balance: $250,000. Max CLTV at 85%: $340,000. Maximum HELOC: $340,000 − $250,000 = $90,000. The first mortgage balance is the main constraint — more equity means a larger available line.
HELOC vs. Home Equity Loan
Both are second mortgages backed by home equity — but they deliver funds differently and carry different risk profiles. See the full home equity loan guide →
| Factor | HELOC | Home Equity Loan |
|---|---|---|
| Funds Delivery | Revolving credit line — draw as needed | Lump sum at closing |
| Interest Rate | Variable — tied to Prime | Fixed for life of loan |
| Payment During Draw | Interest only on drawn amount | Full P&I from day one |
| Flexibility | High — draw, repay, redraw | None — fixed disbursement |
| Rate Risk | Yes — payment rises if Prime rises | None — locked at closing |
| Best For | Ongoing projects, staged needs | One-time large expense |
HELOC vs. Cash-Out Refinance
These are the two main ways to access home equity. The right choice depends almost entirely on your existing mortgage rate. See the full cash-out refinance guide →
Choose HELOC When...
Choose Cash-Out Refi When...
What Homeowners Use HELOCs For
The revolving, draw-as-needed structure makes HELOCs especially well-suited for uses where the spending is staged or uncertain in total amount.
Home Renovation
The most common HELOC use. Draw as each phase of construction is invoiced — pay only for what's been spent, not the full project budget.
Education Costs
Fund tuition semester by semester at mortgage rates. Draw each semester, let the line reset between payments.
Emergency Reserve
A $50,000 HELOC costs nothing until drawn. Many homeowners open one simply as a backstop — it's there if needed, costs nothing if not.
Debt Consolidation
Consolidate high-interest revolving debt into a HELOC at a lower rate. Frees up monthly cash flow while preserving your first mortgage rate.
Investment Down Payment
Use the HELOC as the down payment source for an investment property while keeping your primary mortgage intact.
Business Capital
Self-employed homeowners often use a HELOC for business working capital — lower rate than most business financing, flexible draw structure.
Want to See Your HELOC Options?
Bayou Mortgage will calculate your available equity, compare HELOC vs. cash-out refi based on your existing rate, and show you both options side by side.