HELOC & HELOAN

What is a home equity line of credit (HELOC)?

A home equity line of credit (HELOC) is an “open-end” line of credit that allows you to borrow repeatedly against your home equity.

A HELOC lets you borrow money using the available equity in your home, which is the value of your home minus the amount you owe on your mortgage. Only consider a HELOC if you’re confident you can keep up with the loan payments. If you fall behind or can’t repay the loan on schedule, you could lose your home.

Tip

Date of Last Revision: August 8, 2026

Before you borrow, find out What You Should Know About Home Equity Lines of Credit (HELOCs) . The CFPB booklet can help you understand how HELOCs work, shop around, and watch out for pitfalls.

For these kinds of loans, you should receive Truth-in-Lending disclosures. If you are shopping for a reverse mortgage, you will also receive a Good Faith Estimate (GFE) and a HUD-1 or HUD-1A Settlement Statement. Please see below:

Borrowing from a HELOC

If you get a HELOC, you can generally spend up to your credit limit anytime during the borrowing period, also called the “draw period.” The draw period could last 10 years, for example. Typically, you use special checks or a credit card to draw on your line of credit.

Ask your lender about fees and minimums

Lender can charge certain fees when you get a HELOC. Some plans also require you to borrow a minimum amount each time (for example, $300) or keep a minimum amount outstanding, while other plans require you to take an initial amount when the credit line is set up. You can make payments on your HELOC during the draw period, and many HELOCs have minimum monthly payments based on your current balance.

If the value of your home decreases significantly, your lender might decide not to allow you to take out additional credit under your HELOC plan, which may result in you not having access to as much money as you thought you would. The lender might also freeze your ability to take out additional funds if your financial circumstances change and your lender does not believe you will be able to make your payments.

Download the CFPB booklet to help you understand how HELOCs work, as well as how to shop around and watch out for pitfalls 

Entering the repayment period

After the draw period ends, you stop being able to borrow from your HELOC and enter the “repayment period.” Your lender may set a schedule so that you repay the full balance, often over ten or 20 years. Monthly payments are often significantly higher once you enter repayment. In some cases, you may have to pay back the whole amount you borrowed as soon as the repayment period begins.

HELOCs usually have a variable interest rate, so your payments may change from month to month. Some HELOCs let you convert some or all of your balance from a variable rate to a fixed interest rate—the fixed rate is usually higher than the variable rate but is also more predictable.

What is the difference between a Home Equity Loan and a Home Equity Line of Credit (HELOC)?

A home equity loan is a specific amount of money borrowed against the equity of your home. A Home Equity Line of Credit (HELOC) is a line of credit, like a credit card, except you are borrowing against the equity of your home. For both home equity loans and HELOCs, if you already have a mortgage these new loans would be considered second mortgages that you’d need to pay in addition to your first mortgage.

With a home equity loan, you receive the money you are borrowing in a lump sum payment, and you may have a fixed or adjustable interest rate. With a Home Equity Line of Credit (HELOC), you can borrow or draw money multiple times from an available maximum amount. Similar to a credit card, when you make payments on your HELOC the amount of available credit is replenished. HELOCs usually have adjustable interest rates and the payment will vary depending on the outstanding balance.

Download our booklet to help you understand how HELOCs work , as well as how to shop around and watch out for pitfalls.

If you are having trouble paying your mortgage, before taking out a home equity loan or home equity line of credit, talk to your loan servicer or a housing counselor to see if there may be other options that make better financial sense for you. Call the CFPB at (855) 411-CFPB (2372) to be connected to a HUD-approved housing counseling agency today.

HELOC vs HELOAN

A HELOAN (Home Equity Loan) gives you a one-time lump sum of cash with a fixed interest rate and steady monthly payments. A HELOC (Home Equity Line of Credit) works like a credit card, providing a revolving line of credit where you can borrow, repay, and re-borrow funds as needed, usually with a variable interest rate.

Key Differences

  • How you get the money:

    • HELOAN: All cash is paid out at closing.

    • HELOC: You draw money over time (draw period usually 5–10 years) as you need it.

  • Interest Rates:

    • HELOAN: Almost always fixed, keeping payments identical.

    • HELOC: Usually variable, meaning payments can rise or fall with market rates.

  • Interest Accrual:

When to Use Which

  • Choose a HELOAN for:

    • Big, one-time expenses with a set price tag (e.g., a single roof replacement, paying off specific high-interest debts, or a unified medical bill).

  • Choose a HELOC for:

    • Ongoing, phased, or uncertain expenses (e.g., a multi-stage home remodel, ongoing tuition, or a safety net for emergencies).

If you are trying to decide between the two:

  • What project or expense are you paying for?

  • Do you need the full amount right now or over time?

Mortgage Automated can help you figure out which option fits your budget.

Balloon Payment

A balloon payment on a HELOC is a large, single lump sum that pays off the entire remaining principal balance when the home equity line of credit reaches the end of its term. This happens because the monthly payments made during the draw period were only covering interest, not the principal.

How It Works

  • Lower Early Costs: Monthly bills stay small during the draw period because you only pay interest.

  • The Final Bill: When the account matures, the total amount borrowed comes due all at once.

  • Uncommon Structure: Most modern HELOCs transition into a standard repayment period instead of forcing a sudden lump sum.

Options If You Cannot Pay It

  • Refinance: Apply for a new loan or a standard home equity loan to cover the large balance.

  • Sell the Home: Use the proceeds from selling the property to pay off the final lump sum.

  • Negotiate: Talk to your lender before the maturity date to see if they offer modification options.

Truth-in-Lending (TIL)

What is a Truth-in-Lending disclosure for certain mortgage loans?

A Truth-in-Lending Disclosure Statement provides information about the costs of your loan.

For most mortgage loans where you are giving your home as collateral you will receive a form called the Loan Estimate instead of the initial Truth-in-Lending disclosure, and a Closing Disclosure instead of the RESPA HUD-1 Settlement Statement and the final Truth-in-Lending disclosures. The information provided is comparable to that provided by the Loan Estimates and Closing Disclosures.

You should receive Truth-in-Lending disclosures if you are shopping for a:

If you are shopping for a reverse mortgage, you will also receive a Good Faith Estimate (GFE) and a HUD-1 Settlement Statement.

Good Faith Estimate (GFE)

A Good Faith Estimate, also called a GFE, is a document that a lender must provide when you apply for a reverse mortgage. The GFE lists basic information about the terms of the loan offer.

The GFE includes the estimated costs for the reverse mortgage. The Good Faith Estimate provides basic information about the loan, including estimated costs, which helps you:

  • Compare offers

  • Understand the terms and the real cost of the loan

  • Make an informed decision about choosing a reverse mortgage

For most other kinds of mortgages, you will get a Loan Estimate instead of a GFE.

Unless an exception applies, the lender must provide you with a GFE within three business days of receiving your application or other required information. You can be charged a credit report fee before receiving a GFE. But you can't be charged any other fees until you get the GFE and indicate that you want to proceed with the mortgage loan. In addition to a GFE, you should also receive a HUD-1 Settlement Statement at closing.

Tip: You don't have to accept the reverse mortgage loan offer just because you receive a GFE. You can shop around and get multiple GFEs before choosing a loan or a lender.

HUD-1 or HUD-1A Settlement Statement

What is a HUD-1 Settlement Statement?

The HUD-1 Settlement Statement is a document that lists all charges and credits to the buyer and to the seller in a real estate settlement, or all the charges in a mortgage refinance.

If you applied for a mortgage on or before October 3, 2015, or if you are applying for a reverse mortgage, you receive a HUD-1. In transactions that do not include a seller, such as a refinance loan, the settlement agent may use the shortened HUD-1A form.

If you applied for a mortgage after October 3, 2015, for most kinds of mortgage loans you receive a form called the Closing Disclosure instead of a HUD-1.

Note: You will not receive a Loan Estimate or Closing Disclosure if you are shopping for:

For these kinds of loans, you should receive Truth-in-Lending disclosures. If you are shopping for a reverse mortgage, you will also receive a Good Faith Estimate (GFE) and a HUD-1 or HUD-1A Settlement Statement.