By Ryan Marks, NMLS 519138
Publish date: Friday October 23, 2026
When people ask me about a home equity line of credit, they already know they want to use their equity. Their next questions are about how a HELOC is paid back. How is interest charged? Does the balance ever go down? And would a fixed second mortgage fit better?
Those are the right questions, so here are straight answers from how I walk clients through it.
First, what a HELOC is
HELOC stands for home equity line of credit. It is a line secured by your home behind your first mortgage as a second lien. You can draw from it, pay it down, and draw again.
A HELOC does not change your first mortgage. Your first loan and rate stay where they are. That is why I like it when you want to keep a low first rate, because a cash out refinance replaces your first loan at cash out pricing.
A line can also be set up on a second home or an investment property, depending on the lender and program. Self employed borrowers can often qualify with a bank statement HELOC instead of tax returns; see why self employed write offs shrink your HELOC at the bank and my clip on why the bank denied your HELOC.
How interest is charged on a HELOC
You pay interest only on what you actually use, not the full line.
Here is the example from tapping your property equity without refinancing your first mortgage. Say you have a $100,000 line and have drawn $50,000. Your minimum monthly payment during the draw period is figured on that $50,000 balance, and it is often interest only. That means the minimum payment does not bring the balance down. The balance drops only when you pay more than the minimum, and you can do that any time.
If the line is open and the balance is zero, you have no payment at all.
Most HELOCs carry a variable rate, so the rate and your payment can move up or down over time.
Draw period versus repayment period
According to the Consumer Financial Protection Bureau, a HELOC has two stages.
The draw period is when the line is open. You can borrow, pay back, and borrow again, and the minimum is often interest only.
The repayment period comes after. According to the CFPB, you can no longer draw, and your payment now covers principal as well as interest so the balance gets paid off. The CFPB warns that monthly payments are often significantly higher once repayment starts, and some contracts require a lump sum balloon payment at the end. Read your terms before you sign and plan for the repayment years from day one.
The fixed second: the other way to get equity out
A fixed second mortgage, also called a home equity loan or a closed end second mortgage, works differently. You take one lump sum, and it pays back like a regular fixed mortgage. Take $100,000 up front, make the monthly principal and interest payment over the term, and at the end of the term it is paid off and that equity is back in your home.
So the simple way to compare them:
- HELOC: flexible. Pay only on what you use, often interest only during the draw period, usually a variable rate.
- Fixed second: predictable. One lump sum, a set payment, paid off by the end of the term.
For rentals, some fixed seconds qualify on the property’s rent compared to its payment, similar to DSCR loans, instead of your personal income, which you do not typically find on the HELOC side.
When each one fits
A HELOC fits when you want money on standby or you will use it and pay it back:
- Covering a repair while waiting for an insurance check, then paying the line back when the claim pays.
- Getting a self employed business through a slow season, then returning the balance to zero.
- Home improvements, paying down higher cost debt (see HELOC debt consolidation), or funds toward another property.
A fixed second fits when you need one known amount for one purpose and a payment that never changes.
The disadvantages, honestly
- Your home secures it. The CFPB is clear that if you cannot repay, you could lose your home.
- Variable rates can rise, and so can your payment.
- Interest only can feel too easy. Paying only the minimum leaves the balance unchanged, and the repayment period will come.
- Payments can jump when the draw period ends. The CFPB notes repayment period payments are often significantly higher.
- A line can be frozen or reduced if your home value drops or your finances change.
- Approval is not guaranteed, and terms differ by lender.
Know how you will pay it back before you draw.
One recommendation: match the loan to your payback plan
If you want flexibility and have a plan to pay down what you use, a HELOC lets you reach your equity and keep your first mortgage rate. If you want one amount and a payment that never changes, look at a fixed second.
Frequently asked questions
How is interest charged on a HELOC?
Only on the balance you have drawn, not the full line. During the draw period the minimum is often interest only, and most HELOCs have a variable rate.
What is the difference between the draw period and the repayment period?
According to the CFPB, during the draw period you can borrow and repay freely. In the repayment period you cannot draw anymore, and payments cover principal and interest, so they are often significantly higher.
Does a HELOC change my mortgage rate?
No. A HELOC is a second lien behind your first mortgage, so your first loan and its rate stay the same.
Does a home equity loan have to be paid back?
Yes. A fixed second is paid back with a set monthly payment over its term. A HELOC moves into repayment after the draw period ends.
What if I am self employed and my tax returns show low income?
In the Non QM mortgage space, a HELOC can often use 12 or 24 months of bank statements instead of tax returns, as I explain in why write offs shrink your HELOC at the bank and QM versus Non QM for self employed borrowers.
SEI Mortgage is educational and does not originate. Loans are originated through Everyday Lending Group and brokered through Arbor Financial Group. Ryan Marks, Senior Loan Officer, NMLS 519138. Not available in New York. This post is education, not a credit decision, rate quote, tax advice, or guarantee of approval.
Attribution: Ryan Marks, SEI Mortgage YouTube, Tap Your Property Equity Without Refinancing Your First Mortgage (December 18, 2025) and Short Don’t Give Up Your Low Rate Just to Get Cash Out (October 18, 2026); Consumer Financial Protection Bureau, What is a home equity line of credit (HELOC)? (last reviewed August 28, 2026).
If you want help figuring out which one fits your situation, reach out at www.seimortgage.com and we can walk through your numbers.
