What is a HELOC (Home Equity Line of Credit)?
- A HELOC is a revolving credit line secured by your home, offering flexible borrowing similar to a credit card but with lower rates.
- You borrow during the draw period (typically 5–10 years) and repay during the repayment period (typically 10–20 years).
- Your borrowing limit is based on your available home equity and loan-to-value (LTV) ratio, usually capped at 80–90%.
- HELOCs can fund home improvements, emergency repairs, education, debt consolidation or other major expenses.
- Costs may include variable interest, closing fees, annual charges and early closure penalties.
- You apply by submitting financial documents, completing a home appraisal and reviewing terms with a lender.
A home equity line of credit, commonly called a HELOC, allows you to borrow against that equity while keeping your existing mortgage in place. When used thoughtfully, a HELOC can be a flexible and cost-effective way to fund large expenses, manage cash flow, or prepare for the unexpected.
The Core Concept: What is a HELOC?
A home equity line of credit (HELOC) is a popular, yet complex, financial tool that allows homeowners to leverage their most valuable asset: their home equity.
Defining Home Equity
Home equity is the difference between the current appraised value of your home and the remaining balance you owe on your mortgage(s). It represents the portion of the home you truly own.
Thinking about using your home equity?
Estimate how much you may be able to borrow and what your monthly payment could look like using our HELOC calculator.
The secured risk and LTV ratio
A HELOC is a secured debt, meaning your home serves as collateral. If you default on your payments, the lender has the legal right to foreclose on your home.
Lenders determine your maximum credit limit using the Loan-to-Value (LTV) Ratio. This ratio compares your total secured debt (your primary mortgage + the new HELOC line) to your home’s appraised value. Most lenders limit this ratio to a maximum of 80% to 90%.
How a HELOC works: The two key phases
HELOCs operate in two distinct periods, which are critical to understand to avoid repayment shock:
Draw period vs. repayment period
A. The draw period (typically 5–10 Years)
- Borrowing: You can draw funds from your line of credit as needed, up to your approved limit. As you repay principal, the credit becomes available again (revolving).
- Payments: Monthly payments are often interest-only. While this keeps payments low, your principal balance is not being reduced unless you intentionally pay extra.
- Minimum draw: Be aware that some lenders require a minimum initial draw or a minimum outstanding balance during this period.
B. The repayment period (typically 10–20 Years)
- Borrowing ends: Once the draw period expires, you can no longer take money from the line of credit.
- Payments: Payments shift from interest-only to Principal and Interest (P&I). You must now repay the entire outstanding principal balance, plus interest, over the remaining loan term.
What are HELOC financial principles and costs?
While HELOCs can be cost-effective, borrowers should be aware of potential expenses.
The variable interest rate
The most important feature of a standard HELOC is its variable interest rate. This means your interest rate, and thus your minimum monthly payment, can change over time.
- Rate calculation: Your rate is tied to an economic benchmark (the Index) plus a set percentage determined by the lender (the Margin).
HELOC Rate = Index (e.g., Prime Rate) + Lender Margin
- The Margin is fixed for the life of the loan, but the Index fluctuates with the national economy, causing your rate to rise or fall.
Fixed-rate lock option
Many lenders offer a feature to temporarily convert a portion of your outstanding variable-rate balance into a fixed-rate loan, often for a fee. This provides a way to protect a large balance from potential rate hikes, while preserving the variable-rate flexibility for the remainder of the credit line.
Closing costs and fees
The true cost of a HELOC involves more than just interest. Be prepared to ask about:
- Closing costs: Fees for the appraisal, title search, and credit report. Many lenders advertise "no closing costs" but may include a higher interest rate or early closure penalty to recoup these expenses.
- Annual fee: A maintenance fee charged yearly to keep the line of credit open.
- Transaction/draw fees: Fees charged each time you access funds.
- Early closure penalty: A fee assessed if you pay off the HELOC and close the account within the first few years (e.g., 24–36 months).
Because your home secures the line, missed payments can carry serious consequences. Using borrowed funds strategically and maintaining sufficient financial reserves, remains critical.
What are common uses for a HELOC?
Homeowners use HELOCs for a wide range of purposes, particularly when flexibility matters.
Home improvements and renovations
Projects such as kitchen remodels, bathroom updates, energy-efficient upgrades, roof replacement or finishing a basement are among the most common uses. When improvements increase a home’s value, borrowers may be reinvesting equity back into the property itself.
Home protection and reliability
Expenses like whole-home generators, updated electrical systems, security installations, or water mitigation improvements can help protect both the structure and the people living inside it.
Major purchases and life investments
Some borrowers use a HELOC for appliances, furniture, education costs or professional development, expenses that may not fit neatly into a monthly budget.
Debt consolidation
Because HELOC rates are often lower than unsecured debt, some homeowners use them to consolidate high-interest balances. This approach can simplify payments, though it does convert unsecured debt into debt backed by your home.
Emergency preparedness
Having an open line of credit can provide financial flexibility when unexpected repairs arise, such as HVAC failure or storm-related damage.
Not sure whether a HELOC fits your goal?
A conversation with a lending specialist can help determine whether this option aligns with your timeline, budget and risk tolerance.
What you Need to apply for a HELOC
The HELOC application process is straightforward and typically includes four main steps:
- Prequalification: Use a lender’s calculator to estimate your eligible credit line based on your home value and existing mortgage.
- Application and underwriting: The lender will request detailed financial documentation, including W-2s, pay stubs and tax returns. They will run a credit check and assess your total debt-to-income (DTI) ratio.
- Home appraisal: The lender will order an appraisal (full, drive-by, or Automated Valuation Model) to establish the home’s current market value. This value is used to calculate the final LTV Ratio and determine your approved limit.
- Closing: Once approved, you will sign the final documents. This is when any fees are paid and when you may elect to use the Fixed-Rate Lock option on any initial draw.
Once approved, funds can usually be transferred directly into your checking account, allowing you to move quickly on time-sensitive needs.
Many lenders also allow borrowers to customize repayment terms or lock rates at closing, depending on program features.
Get started
Your home equity can be a powerful financial tool when used with intention and planning.
Put your equity to work—on your terms.
Apply online today, or schedule a conversation with a lending expert to explore your options with confidence.
No fee will be assessed when converting to a fixed-rate option. If there is a current fixed-rate option that is requested to be unlocked, a $100 fee will apply. The fixed-rate option can primarily be done in person at an Associated Bank branch or by calling 1-866-LEND ABC (536-3222). (1331)
Loan products are offered by Associated Bank, N.A., and are subject to credit approval and involve interest and other costs. Please ask about details on fees and terms and conditions of these products. Property insurance and flood insurance, if applicable, will be required on collateral. (1050)
