How does a home equity line of credit work?

A home equity line of credit, or HELOC, lets you borrow against the equity you've built in your home. Your lender sets a credit limit based on a percentage of your home's appraised value minus what you still owe on your mortgage. You can draw from this line as needed during a set draw period, typically 5 to 10 years, paying only interest on what you borrow. After the draw period ends, you enter the repayment period, usually 10 to 20 years, where you pay back both principal and interest. HELOCs typically have variable interest rates tied to the prime rate, so your payments can fluctuate. Your home serves as collateral, meaning failure to repay could result in foreclosure.