HELOC rates today are mostly unchanged. Chances of a Federal Reserve interest rate cut on September 17 are improving. If so, home equity line of credit interest rates could dip slightly lower.

Dig deeper: How to use a HELOC to pay off debt (and when it makes sense)

According to Bank of America, the country's highest-volume HELOC lender, today's average APR on a 10-year draw HELOC is 8.72%. That is a variable rate that kicks in after a six-month introductory APR, which is 6.49% in most states.

Homeowners have an abundant amount of value tied up in their houses — more than $34 trillion at the end of 2024, according to the Federal Reserve. That's the third-largest amount of home equity on record.

With mortgage rates lingering in the high 6% range, homeowners are not going to let go of their primary mortgage anytime soon, so selling a house may not be an option. Why let go of your 5%, 4% — or even 3% mortgage?

Accessing some of that value with a use-it-as-you-need-it HELOC can be an excellent alternative.

Read more: How to get a HELOC in 6 steps

HELOC interest rates are different from primary mortgage rates. Second mortgage rates are based on an index rate plus a margin. That index is often the prime rate, which today is 7.50%. If a lender added 1% as a margin, the HELOC would have a rate of 8.50%.

Lenders have flexibility with pricing on a second mortgage product, such as a HELOC or home equity loan, so it pays to shop. Your rate will depend on your credit score, the amount of debt you carry, and the amount of your credit line compared to the value of your home.

And average national HELOC rates can include "introductory" rates that may only last for six months or one year. After that, your interest rate will become adjustable, likely beginning at a substantially higher rate.

You don't have to give up your low-rate mortgage to access the equity in your home. Keep your primary mortgage and consider a second mortgage, such as a home equity line of credit.

The best HELOC lenders offer low fees, a fixed-rate option, and generous credit lines. A HELOC allows you to easily use your home equity in any way and in any amount you choose, up to your credit line limit. Pull some out; pay it back. Repeat.

Meanwhile, you're paying down your low-interest-rate primary mortgage like the wealth-building machine you are.

Today, FourLeaf Credit Union is offering a HELOC rate of 6.49% for 12 months on lines up to $500,000. That's an introductory rate that will convert to a variable rate later. When shopping lenders, be aware of both rates. And as always, compare fees, repayment terms, and the minimum draw amount. The draw is the amount of money a lender requires you to initially take from your equity.

The power of a HELOC is tapping only what you need and leaving some of your line of credit available for future needs. You don't pay interest on what you don't borrow.

Rates vary so much from one lender to the next that it's hard to pin down a magic number. You may see rates from nearly 7% to as much as 18%. It really depends on your creditworthiness and how diligent a shopper you are.

For homeowners with low primary mortgage rates and a chunk of equity in their house, it's probably one of the best times to get a HELOC. You don't give up that great mortgage rate, and you can use the cash drawn from your equity for things like home improvements, repairs, and upgrades. Of course, you can use a HELOC for fun things too, like a vacation — if you have the discipline to pay it off promptly. A vacation is likely not worth taking on long-term debt.

If you take out the full $50,000 from a line of credit on a $400,000 home, your payment may be around $395 per month with a variable interest rate beginning at 8.75%. That's for a HELOC with a 10-year draw period and a 20-year repayment period. That sounds good, but remember, it winds up being a 30-year loan. HELOCs are best if you borrow and pay back the balance in a much shorter period of time.

There are several ways to turn your home equity into cash. One of the most popular? That’d be a home equity line of credit — or HELOC. Despite their popularity, HELOCs aren’t like your average loan product. No lump sum of cash gets handed over, and you usually won’t owe huge monthly payments right after closing on your loan.

Instead, you’ll go through two distinct periods: The draw period and the repayment period. Monthly payments during the repayment period are similar to other types of loans, but the draw period is what makes a HELOC unique. Here’s how the draw period works.

Learn more: 7 ways to build equity in your home

In this article:

What is a HELOC draw period?

How HELOC draw periods work

Payments during the draw period

HELOC draw period vs. repayment period

Preparing for your HELOC draw period to end

FAQs

A HELOC “draw period” is when you can withdraw money from your credit line. A 10-year draw period is pretty standard, but the exact length can vary by the HELOC lender.

HELOCs are sort of like credit cards. Once approved for one, you’ll have access to a hefty line of credit. You can pull money from that credit line as needed — usually using a particular card or checkbook — but only for as long as the draw period lasts.

So, if your draw period is 10 years, you have a decade to withdraw cash from your credit line. This can be helpful if you have an extended project you need to finance (maybe a large-scale renovation at your house), and you’re not sure how much you’ll need to borrow. It can also make HELOCs a smart financial safety net since they give you long-term access to funds in a pinch.

Read more: Is a HELOC a good idea? Here are the pros and cons.

While in the draw period, you usually only need to pay interest on the money you’ve taken out of your HELOC fund — you don’t need to repay the principal yet. Let’s say you have a HELOC for $30,000 with an 8% interest rate and start by withdrawing $1,000. You’ll only pay the interest on the $1,000 throughout the draw period (unless you take out more later, then you’ll pay interest on the larger amount).

You have the option to pay more than that, though, if you like. For example, you might opt to repay that full $1,000 if you can comfortably afford to do so. That would then replenish your credit line to $30,000, and you could borrow that $1,000 again later — as long as you’re still in the draw period.

In some cases, a HELOC may come with a minimum monthly payment that covers interest and a small portion of principal during the draw period. The exact arrangement depends on the lender, though.

Dig deeper: What is an interest-only HELOC, and how does it work?

It’s common for HELOCs to have 30-year terms. Once your 10-year draw period comes to a close, you’ll enter what’s called the “repayment period.” This is when you’ll start making full principal and interest payments to your lender. On most HELOCs, the repayment period lasts for 20 years.

The amount you’ll pay per month will depend on how much you’ve withdrawn from your HELOC, as well as what your interest rate is. As you get closer to this point in your term, you can use a HELOC payment calculator to estimate your monthly payments.

In rare occurrences, you may owe the full balance in one lump sum once your draw period ends. This is called a balloon payment.

Read more: How to get a HELOC in 6 simple steps

As the end of your HELOC draw period approaches, you’ll need to have a plan for repaying the balance.

This might mean readjusting your budget to make room for your estimated monthly payments, or you may want to explore other options. For example, you could do a cash-out refinance on your original mortgage and use the cash to pay off your HELOC balance. Just make sure the numbers work in your favor. (Refinancing means replacing your initial mortgage term and rate entirely. If that would mean losing an ultra-low mortgage rate, it may not be worth it.)

Taking out a new HELOC or home equity loan could also work. You’d simply use the funds from the new loan to pay off your existing balance. This may seem counterintuitive, but if you’re having trouble affording payments on your current HELOC, either of these second mortgages will give you the money to repay the principal.

If you get a new HELOC, you can use the 10-year draw period to work on improving your personal finances so you’re more prepared for the next repayment period. With a home equity loan, you’ll probably have 30 years to repay the principal rather than 20 years, resulting in lower monthly payments that could be easier to fit into your budget.

If you’re not sure of the right way to handle your HELOC payments, talk to a mortgage professional or financial advisor. They can help you make the right plan for your finances.

Learn more:

HELOC vs. cash-out refinance

HELOC vs. home equity loan

With most HELOCs, you have 10 years to withdraw money from your HELOC (called the “draw period”). Typically, you will make interest-only payments during this time. Once the draw period ends, you then have 20 years after that to repay the full balance plus interest.

When your HELOC draw period ends, you’ll start making full principal and interest payments to your mortgage lender. You usually have 20 years to pay off the balance.

During a HELOC’s draw period, you’ll usually only pay interest on the money you withdraw. You can pay more than this if you’d like, but it is not required. Regular monthly payments toward the principal and interest are not mandatory until the repayment period, which usually starts 10 years into the HELOC’s term.

Although fixed-rate HELOCs exist, these second mortgages usually have variable interest rates. The answer to how often the rate changes depends on the terms of your HELOC, but generally speaking, your HELOC rate can be adjusted monthly based on the index rate it’s linked to. This could mean a higher or lower monthly payment as a result.

You can certainly pay off your HELOC during the draw period, but you’re not required to. During the draw period, most lenders only require you to make interest payments. Once you enter the repayment period, that’s when monthly payments toward both the principal and interest will begin.

This article was edited by Laura Grace Tarpley.

If you have enough equity in your home, you may be able to tap into it using a home equity line of credit, or HELOC. Before using a HELOC for a down payment on a second home or investment property, it’s essential to know how it works, its benefits, and the associated risks.

Homeowners can use the equity from their primary residences for a down payment on a vacation home or investment property. However, you’ll need sufficient equity to qualify.

A home’s equity is its value minus the outstanding mortgage. For example, if a property appraises for $500,000, and the outstanding mortgage balance is $300,000, the equity is $200,000, or 40%.

When determining your eligibility, lenders will consider your equity, credit score, debt-to-income (DTI) ratio, and income. Here are some of the typical HELOC requirements you can expect.

Enough home equity: Homeowners typically need 15% to 20% equity in their home to meet lender requirements.

Good credit score: Many HELOC lenders want a minimum credit score of 680, but the higher the better.

Low DTI: Ideally, a DTI of 45% or lower signals to lenders that you can manage your debt.

Sufficient income: Stable income and employment communicate to lenders that you can repay the HELOC balance.

Read more: What can you use a HELOC for? 7 ways homeowners use the funds.

A HELOC is a line of credit that works like a credit card. When buying a second home, you can use HELOC funds for the down payment, closing costs, or other expenses up to your approved credit limit.

You usually have 10 years to withdraw from your HELOC. During this draw period, you’re typically only required to make interest-only payments.

Once the draw period ends, you can no longer access your line of credit. In the repayment period, you’ll make full interest and principal payments until the balance is paid off, typically over 20 years.

If you need to borrow money to come up with cash for a down payment, HELOCs can be more affordable than other loans or lines of credit. Here are a few of their advantages.

Potentially lower interest rates: HELOC rates are typically lower than those for credit cards and personal loans, allowing you to borrow money for less.

Access funds as needed: You can withdraw from the HELOC as often as needed during the draw period.

Lower payments up-front: Lenders usually require interest-only payments during the draw period, which can be much lower than the minimum payments for other loans.

May be tax-deductible: You may be able to deduct HELOC interest if you use the money to purchase a second home, but you’ll have to meet other IRS guidelines.

A home equity line of credit can be risky, primarily because your home is collateral. Here are a few of the disadvantages to consider.

Variable interest rate: Most HELOCs have variable interest rates that fluctuate depending on the economy. Payments on variable-rate loans can be harder to predict or plan for.

May require closing costs: Lenders may charge closing costs that cover originating, underwriting, and processing the loan. HELOCs can also have additional charges, like account management fees or early cancellation penalties.

Easier to overspend: You may be tempted to use your credit line for more than you need to, especially if you only make the minimum interest-only payments.

Default risks foreclosure: Your home is collateral for a HELOC. So, if you have trouble repaying the balance, the lender can foreclose on your home.

Borrowing from your home’s equity to buy a second home could make sense, but only if you can withstand the financial risk.

“There’s a compounded risk of increased rates and a strained cash flow, so a HELOC is best for well-income homeowners, with healthy reserves, and a plan to refinance or pay it off early — ideally within 12 to 24 months,” said Randall Yates, investment specialist at VA Loan Network, via email. “Where it doesn't work is if you live on a tight budget, especially when rates are volatile, or you’re buying a property that already pushes your DTI limits.”

Consider these alternatives if using a HELOC for a down payment isn’t right for you.

Home equity loan: Access your home’s equity in a lump sum, typically repaid at a fixed interest rate. Bridge home equity loans delay repayment until you sell the home.

Cash-out refinance: Refinance your current home loan, borrowing the existing mortgage balance plus cash from your equity that you can use toward a down payment on a second home.

Personal loan: Most personal loans are unsecured, meaning you can borrow a lump sum and repay over a fixed period without collateral.

You can use a HELOC to make a down payment on a second home or investment property. You’ll likely need 15% to 20% equity and meet other borrower requirements, like a good credit score, low DTI, and stable income.

HELOCs are lines of credit, allowing you to access your home equity for the down payment and fees, up to your approved credit limit. You usually have 10 years to access your HELOC funds. During this draw period, you can make interest-only payments. Once you’re in repayment, you’ll make principal and interest payments until the balance is paid off.

A HELOC could be a suitable option for homeowners with significant equity in their primary residence. With lower rates than personal loans and interest-only payments up-front, a HELOC is often a more affordable way to borrow, but only if you can keep up with the payments. If you’re unable to repay the HELOC, you could lose your primary residence.

You may dream of the day you pay off your mortgage in full and don’t have to make monthly payments anymore. But there are other benefits to paying down your loan too — the main one being that you get to build equity.

Home equity is the accrued paid-off portion of your home. You can receive that equity as cash with a cash-out refinance or second mortgage, then use the money to pay for other big expenses. You may also view your home equity as money that could help you with a down payment on a future home. Owing less on one home certainly helps when you want to sell it to buy another.

Understanding home equity is crucial to learning how to build more and use it to your advantage.

Learn more: How to determine your home's value

In this article:

What is home equity?

Why is building home equity important?

7 tips for building equity

FAQs

Home equity is the percentage of your mortgage you’ve paid off and own outright. The easiest way to estimate how much equity you have is to subtract the remaining mortgage principal from the market value of your home. You can use comparisons of houses similar to yours or undergo an appraisal to get a better idea of the market value of your house. Or, to be conservative, you can simply subtract how much you owe from the amount you paid when you bought it.

For example, let’s say you bought a house for $500,000 and have $350,000 left on your mortgage. Here’s how to determine the amount of equity you have:

$500,000 - $350,000 = $150,000. You have $150,000 in home equity.

$150,000 is 30% of $500,000 (150,000 divided by 500,000 =0.30%), so you have 30% equity in your house.

Of course, these numbers could change if market values have increased or decreased since you bought the home or if you’ve made significant updates to increase the home’s value. But these equations will give you a basic idea of how to calculate your home equity.

Keep learning: How much can I borrow with a home equity loan?

Building equity in a house is a good thing because it helps homeowners build wealth. The more equity you have in your home, the more you’ll pocket if you sell. The home can be a valuable asset to pass down to the next generation too.

Having equity in your home also gives you a way to cover bigger purchases. If you face a financial emergency or hefty medical bill, you can use a home equity loan or home equity line of credit (HELOC) to tap your equity and receive cash. This can be a better option than charging a large expense to a credit card, which usually charges a higher interest rate than these second mortgages.

Dig deeper: How to choose between a home equity loan and a HELOC

Building equity in your home happens naturally as you make your regular monthly mortgage payments. However, by using one or more of the following tips, you could build equity faster without drastically altering your monthly budget.

The following tips use a house with a $400,000 mortgage, 30-year term, and 6% fixed interest rate as an example.

Building equity from paying down your mortgage loan takes time. At the beginning of your loan, most of your payment goes toward mortgage interest. As time passes, less and less goes toward interest, and more goes to paying down the actual principal. The longer you stay in the home, the more principal you’ll pay off. For the $400,000 30-year mortgage with a 6% interest rate, you would pay off over $27,000 in five years.

Staying in your home longer also gives time for market prices to rise, so your house may be worth more than if you sold it after just one or two years.

Biweekly mortgage payments can speed up your repayment because you will make two extra payments annually. By making biweekly payments on a $400,000 loan with a 6% interest rate, you’ll pay off your mortgage in just shy of 25 years. So, not only will you gain equity faster, but you’ll also pay off your mortgage sooner.

If you get extra cash from a tax return, workplace bonus, or inheritance, making a one-time extra payment on your mortgage bumps up your equity. Just verify with your mortgage lender that the extra payment is going toward your principal, not interest. Paying extra toward interest will not increase your equity.

Learn more: Should you make one extra mortgage payment per year?

As little as $10 or $20 monthly can reduce your mortgage repayment time frame by a few months. For example, adding an extra $20 per month on a $400,000 mortgage increases your equity by almost $1,400 in the first five years. This strategy also cuts eight months off the end of your 30-year mortgage term.

A cash-out refinance is one tool for tapping your home equity. But it involves taking out a larger loan so you can receive some of it in cash. If you take money out of your home, you are reducing accrued equity.

While a cash-out refi may be a good option for other reasons, it isn’t a good tool for building equity.

If you made a down payment of less than 20% on a conventional mortgage, you’re probably paying for private mortgage insurance (PMI) every month. Once you have 20% equity in your home, request that your mortgage lender remove the PMI. At 22%, the lender should automatically remove PMI.

Once you’re done with PMI payments, you can keep putting that amount toward your monthly mortgage payment. Instead of going toward mortgage insurance, this money will now help you gradually build up your equity.

Dig deeper: How to get rid of PMI and lower your mortgage payments

Remodeling or making major home improvements can increase your property value. When deciding which improvements to make, consider how much value they will add to the house.

For instance, replacing your roof might make your home more appealing to buyers (especially if your current roof is already fairly old), but a new roof is also very expensive. On the other hand, painting the interior of your house is a more affordable way to make the home look and feel nicer.

Read more: How to use your home equity to pay for home improvements

Building equity is beneficial because it helps you accumulate wealth and provides a source of income should you need access to cash for a large expense.

Aggressively paying down your mortgage principal is a great way to build equity in a home. Another option is making home improvements that add value to the house and aren’t too expensive.

The amount of equity you accumulate in five years depends on the size of your home loan. You typically don’t build as much equity at the beginning of your loan term because most of your monthly payments go toward interest. As time goes on, more and more will be applied to your principal balance.

This article was edited by Laura Grace Tarpley.