How Does a HELOC Work?

A home equity line of credit (HELOC) gives you access to the portion of your home’s value you’ve already paid off, known as equity. Used wisely, it can be a flexible and cost-effective way to finance everything from renovations to education to high-interest debt consolidation.

But how exactly does a HELOC work? And when does it make sense to use one? Let’s walk through the basics, some smart strategies, and a few common myths that could trip you up.

How does a HELOC work?

A HELOC is a type of secured loan, meaning that as the borrower, you offer some type of asset as collateral. For a HELOC, your home is the collateral. By using your home as collateral, you’re giving the lender confidence they’ll be repaid, which can make it easier to qualify and may result in lower interest rates than other types of credit, such as unsecured loans or credit cards.

For example, with a Comerica Home Equity Flexline®, you can borrow against the available equity in your home (up to 80% of your home's value, minus what is owed).

In practice, a HELOC is similar to a credit card. It gives you access to a set credit limit, and you can borrow as needed. You only pay interest on the amount you use, not the full credit limit. This makes a HELOC a flexible option for large, planned expenses, while credit cards are better suited for everyday spending.

Flexibility is a major advantage. With a traditional loan, you get a lump sum and immediately begin paying back both principal and interest. A HELOC, by contrast, has two distinct phases:

• Draw period (usually 5 to 10 years): You can access funds as needed and often make interest-only payments during this time.
  
• Repayment period (often 10 to 20 years): You can no longer borrow, and your monthly payments now include both principal and interest.

Most HELOCs include a variable interest rate, which means the rate can rise or fall over time based on economic conditions. Some lenders offer fixed-rate HELOC options, which lock in your rate for greater predictability, but often at the expense of flexibility or lower initial rates.

What can a HELOC be used for?

One of the biggest advantages of a HELOC is how flexible it is. Unlike some loans that can only be used for a specific purpose, like student loans or auto loans, HELOC funds can be used for almost anything.

That said, the smartest uses tend to focus on increasing the long-term value of your home or improving your financial stability. Because you’re borrowing against your home, it’s best to think like an investor by choosing expenses that offer a meaningful return.

Here are some smart ways to put a HELOC to work:

• Home renovations and repairs: Use funds to remodel a kitchen, update windows or tackle repairs that make your home shine. If the improvements directly enhance the home securing the loan, interest may be tax-deductible.
  
• Education expenses: Cover tuition, books, housing or other costs tied to earning a degree. A HELOC often offers lower interest rates than private student loans, and education can lead to a stronger earning potential.
  
• Debt consolidation: Reduce high-interest credit cards or personal loans and replace them with one lower-rate payment. Just be sure to pair this strategy with a plan to avoid future debt buildup.
  
• Business investment: Fund a new venture or expand an existing one, as long as you’ve done the planning and understand the risks. A HELOC may offer better terms than traditional business loans. But remember: your home is on the line.
  
• Medical costs or other major expenses: If a large, unexpected cost arrives before you’ve had time to save, like a medical bill or urgent tuition payment, a HELOC can provide fast access to funds and a manageable repayment timeline.

What shouldn’t a HELOC be used for?

There are few restrictions on how you can use a HELOC, so it’s up to you to borrow responsibly. A good rule of thumb: avoid using HELOC funds for anything you can’t reasonably repay within your budget, either before or during the repayment period.

In other words, a HELOC shouldn’t be treated like a long-term solution for short-term wants. Using it for lifestyle purchases or everyday spending — like vacations, high-end electronics or impulse upgrades — can put you at risk of falling behind when repayment kicks in.

That doesn’t mean you can’t use a HELOC for a vacation or home improvements that won’t significantly increase its value, but you should only do so with a clear, realistic plan to pay it off. Because your home secures the loan, the stakes are higher than with other types of borrowing.

What makes a HELOC right for me?

Wondering if a HELOC is a good fit for your financial needs? This credit option can be especially beneficial when you meet three qualifications that position you for more favorable terms:

• A strong credit score: Your credit score helps determine your eligibility and influences your interest rate. The higher your score, the more borrowing power and better rates you’re likely to receive. Many lenders look for a score of 680 or higher to qualify, and 720+ to access the most competitive rates.
  
• Significant equity in your home: Equity is the difference between what your home is worth on the market and what you still owe on your mortgage. The more equity you’ve built, the more credit you may be able to access. Most HELOCs are capped at 80–85% of your home’s appraised value (minus what is owed).
  
• A low debt-to-income (DTI) ratio: Lenders want to see that you can manage additional payments. A lower DTI — meaning your monthly debts take up a smaller portion of your income — signals financial stability. A debt-to-income (DTI) ratio below 40% will position you with strength when shopping for a HELOC.

What are popular misconceptions about a HELOC?

Even though HELOCs have been around for a long time, there are still plenty of myths that can cause confusion. Let’s clear up four of the most common ones:

Misconception #1: A HELOC is the same as a home equity loan
While both let you borrow against the equity in your home, they work differently.

A home equity loan provides a one-time lump sum with a fixed interest rate and pre-determined monthly payments over a set length of time.

A HELOC, by contrast, offers a revolving line of credit that allows you to borrow when you need, typically with a variable interest rate. HELOCs also include two phases: a draw period where funds are accessible, and a repayment period where you begin repaying principal and interest.

Misconception #2: You can borrow all of your home’s equity
Most HELOCs are capped at 80–85% of your home’s appraised value, minus your existing mortgage balance. For example, if your home is worth $375,000 and your mortgage balance is $225,000, your available credit might be closer to $50,000–$65,000, depending on the lender and your credit qualifications. Reviewing your equity position and shopping around for terms is an important step in the process.

Misconception #3: HELOCs are only for home renovations
Home improvements are a common and often beneficial use, especially if they increase your home’s value, but a HELOC can be used for many other purposes. Common examples include covering education costs, consolidating high-interest debt, funding a business or paying for major medical expenses.

Just keep in mind that typically only improvements made to the home securing the loan may qualify for tax-deductible interest under current IRS guidelines. Consult with your tax advisor if your goal is to deduct interest.

Misconception #4: New homeowners can’t qualify
Equity is usually built over time through mortgage payments and appreciation. However, new homeowners who made a large down payment or purchased in a rapidly appreciating market may reach their equity threshold sooner than expected. If you’re unsure, it’s worth speaking with a lender to understand eligibility based on your current equity and financial profile.

Take the next step with a HELOC

Now, you should have a clearer picture of how a HELOC works and how it can support your financial goals. When used strategically, a HELOC can provide flexible access to funds and offer lower interest rates than other types of credit. But because your home is on the line, it’s essential to borrow with a plan.

When you're ready to explore your options, stop by your local Comerica banking center for help understanding current rates, eligibility requirements and how a Comerica Home Equity Flexline® fits into your broader financial picture.