A home equity line of credit lets you borrow against the value you have built in your home, but as a line rather than a lump. The lender approves a maximum, often up to 80% or 85% of the home's value minus what you still owe on the mortgage. During the draw period, typically ten years, you borrow and repay as needed, paying interest only on the balance. Then a repayment period, often twenty years, begins, during which you can no longer draw and must pay down what you borrowed.
Example: a $600,000 home with a $350,000 mortgage. At 80% combined loan-to-value, the lender allows $480,000 of total debt, so the HELOC limit is $130,000. You might draw $30,000 for a kitchen, pay it back over two years, and draw again later for something else.
Rates are variable, usually tied to the prime rate, so the payment moves with the market. Because the loan is secured by your house, rates are far lower than credit cards, and the interest is deductible if the money is used to improve the home. The flip side of that security is that missing payments puts the house at risk.
A HELOC differs from a home equity loan, which is a fixed lump sum at a fixed rate, and from a cash-out refinance, which replaces the whole mortgage.
The common mistake is treating a HELOC as an emergency fund. Lenders can freeze or reduce lines when home values fall or credit tightens, which tends to be exactly when the money is needed.