For years, a home equity line of credit (HELOC) was one of the most flexible borrowing tools available to homeowners. You could open a HELOC and draw from it as needed — only paying interest on the outstanding balance.
That flexibility has been disappearing over the past few years, however. As new lenders enter the HELOC market, many now require borrowers to withdraw a large portion of their credit line up front. If you’re shopping for a HELOC today, it’s more important than ever to understand how these changes could affect your borrowing options and costs.
Here’s how to shop for a HELOC that still has its most powerful feature.
The Federal Reserve estimates that homeowners have over $34 trillion in home equity as of the third quarter of 2025. However, over 80% with outstanding mortgages have an interest rate below 6%. That means a cash-out refinance is unlikely to be a wise option for homeowners looking to tap the value of their home.
That’s what makes second mortgages, such as home equity lines of credit and home equity loans, so appealing. You keep your low-rate primary mortgage and use a new loan to tap your equity.
Lump-sum home equity loans are simple enough. You receive a one-time distribution of the total amount of equity that you are allowed to borrow and pay a fixed rate of interest.
Home equity lines of credit have a little more flexibility. You draw on your equity as needed and pay a variable rate of interest on the withdrawals. That allows you the opportunity to pay less interest. You can repay the line of credit and draw from it again later.
But things have changed.
Read more: Home equity line of credit (HELOC) vs. home equity loan
Depository institutions, such as banks and credit unions, were the original sources of HELOCs. They had the capital to lend from customer deposits.
Then, nonbank lenders came on the scene. Without deposits, assets to loan are derived from investors. These institutional investors have a capital structure that favors higher-yielding, faster-paying assets. In other words, investors funding nonbank HELOCs are looking for generous profits on a short timeframe.
That changed the structure of HELOCs.
Previously, banks allowed customers to open HELOCs without an initial credit-line draw. For example, you get a $150,000 HELOC and don’t pull cash from it immediately. Obviously, many people had an idea of what they would use at least some of the cash for, but others were opening HELOCs for “just-in-case” uses.
As nonbank lenders entered the market, initial withdrawals became increasingly stringent. It’s common now to see initial draws of 80% or more required. So, in our example above, with a $150,000 HELOC, you would be required to take $120,000 immediately. Maybe even the whole $150,000.
That eliminates the ability to pay interest only on what you need.
Some lenders may also charge fees based on inactivity in a HELOC, or require minimum outstanding balances and periodic withdrawals.
If you want the whole $150,000 in equity, a lump-sum home equity loan would serve the purpose — with a fixed interest rate that never changes.
Studies show that higher minimum draws can increase the likelihood of delinquent payments. If a borrower is mandated to draw more than they really need — or have budgeted for — they might not be able to pay the bill.
One report analyzing 2023 HELOCs stated, “Almost every non-bank HELOC lender requires a minimum borrower draw requirement of at least 50% of the available line amount, with some lenders requiring much higher minimum draw requirements of 75% up to 100%. All things being equal, it is possible that this might accelerate borrower delinquency and ultimately losses.”
The study concluded that “borrowers who have utilized more than 95% of their available credit are nearly four times more likely to become severely delinquent compared to borrowers with lower utilization rates.”
If you want a HELOC that operates as a true line of credit, shop multiple lenders to find the one with the best interest rate and terms, as well as no minimum outstanding balance requirements, and the lowest initial draw.
You may find that lenders offering the most HELOC flexibility are depository institutions, such as banks and credit unions.