How a HELOC works
A home equity line of credit (HELOC) is a revolving loan secured by your home. The lender approves a credit limit, and you borrow from it when you need to, a bit like a credit card with a much lower rate. You pay interest only on the amount you have drawn, not on the whole limit.
A HELOC has two phases:
- The draw period, often 10 years. You can borrow, repay and borrow again. Many lenders only require interest payments during this time.
- The repayment period, often 10 to 20 years. You can no longer draw, and the balance is repaid in monthly payments of principal and interest, like a normal loan.
The switch from one phase to the next is where many borrowers get caught out. If you paid only interest for 10 years, you still owe every dollar you borrowed, and now you have less time to repay it. The calculator above shows both payments side by side and the jump between them.
Step 1: how big a line can you get?
Lenders look at your combined loan-to-value ratio (CLTV): everything secured by the home divided by its value. Most cap it somewhere between 80% and 90%, and your credit score, income and debts also count.
For a $450,000 home with $250,000 left on the mortgage and an 85% limit: 450,000 × 0.85 = $382,500, minus $250,000 = $132,500 of available credit. If the result is zero or negative, you do not have enough equity at that limit.
The home value is the lender’s appraised value, not the price you hope to get. If prices in your area have fallen, the line can be smaller than you expect.
Step 2: the payment formulas
During an interest-only draw period:
When repayment starts, the balance is spread over the remaining months:
B = balance when repayment starts · r = yearly rate ÷ 12 · n = repayment months
If you choose principal + interest during the draw, the calculator sizes the payment so the balance would be repaid over the whole draw plus repayment term. That keeps the payment steady when the draw period ends, as long as the rate does not change.
Worked example 1: interest-only, then 20 years of repayment
You draw $50,000 at 8.5% with a 10-year draw period and a 20-year repayment period.
- Draw period: 50,000 × 0.085 ÷ 12 = $354.17 a month for 120 months. That is $42,500 of interest, and the balance is still $50,000.
- Repayment: r = 0.085 ÷ 12 and n = 240, so M = $433.91 a month.
- Payment shock: +$79.74 a month (about 23%).
- Total interest over 30 years: $96,638.79, almost twice the amount you borrowed.
Worked example 2: paying principal from the start
Same $50,000 at 8.5%, but you pay principal and interest during the draw period too.
- Payment: $384.46 a month for the full 30 years, with no shock at month 121.
- Balance when repayment starts: $44,301.27, so you have already repaid $5,698.73.
- Total interest: $88,404.43, which is $8,234.36 less than the interest-only plan.
Paying $30 more a month in the draw period removes the payment jump and saves over $8,000.
Worked example 3: what if the rate rises?
HELOC rates are usually variable: the prime rate plus a margin. Suppose the rate is 10.5% by the time repayment starts.
- Draw period: still $354.17 a month at 8.5%.
- Repayment at 10.5%: $499.19 a month, a jump of $145.02 (41%).
- Total interest: $112,305.59.
Use More options above to set a different repayment rate. A test 1 to 2 points above today’s rate shows whether your budget can absorb a rise.
How the repayment period changes the shock
For $50,000 at 8.5% with 10 interest-only years, the length of the repayment period decides the size of the jump:
| Repayment period | Repayment payment | Increase vs $354.17 | Total interest |
|---|---|---|---|
| 10 years | $619.93 | +$265.76 | $66,891.41 |
| 15 years | $492.37 | +$138.20 | $81,126.56 |
| 20 years | $433.91 | +$79.74 | $96,638.79 |
A shorter repayment period means a bigger monthly payment but much less interest overall.
Payments per amount drawn
Interest-only payment during the draw period, then the payment over a 20-year repayment period at the same rate:
| Rate | $10,000 drawn | $50,000 drawn | $100,000 drawn |
|---|---|---|---|
| 7% | $58.33 → $77.53 | $291.67 → $387.65 | $583.33 → $775.30 |
| 8% | $66.67 → $83.64 | $333.33 → $418.22 | $666.67 → $836.44 |
| 9% | $75.00 → $89.97 | $375.00 → $449.86 | $750.00 → $899.73 |
| 10% | $83.33 → $96.50 | $416.67 → $482.51 | $833.33 → $965.02 |
Costs to ask about
The rate is not the only cost. The CFPB’s HELOC guide lists several fees to compare between lenders:
- Closing or origination costs: appraisal, title search, application and attorney fees. Some lenders waive them if you keep the line open for a few years.
- Annual or membership fees for keeping the line open, even if you never use it.
- Transaction fees each time you draw.
- Early closure fees if you close the line within the first two or three years.
- Rate caps: the most the rate can rise in a period and over the life of the line. A cap protects you from the worst of a rate rise.
Tips
- Draw only what you need. You pay interest only on the balance, so a large limit costs nothing until you use it.
- Pay principal during the draw if you can. Even small principal payments shrink the balance and soften the payment shock.
- Watch the end of the draw period. Put the date in your calendar a year ahead and decide whether to repay faster, refinance or convert to a fixed rate.
- Know the tax rule. In the US, HELOC interest is deductible only if you itemize and spend the money to buy, build or substantially improve the home (IRS Publication 936).
- Check your total debt. Lenders look at your debt-to-income ratio as well as your equity. Our debt-to-income ratio calculator shows where you stand.
Common mistakes
- Budgeting on the interest-only payment. It is a teaser for the real cost. Always look at the repayment payment too.
- Treating the line as savings. A lender can freeze or cut the line if your home’s value drops or your finances change, often just when you need it.
- Ignoring the variable rate. A 2-point rise on $100,000 adds about $167 a month to an interest-only payment.
- Using home equity for spending that does not last. Your home secures the debt, so missed payments can lead to foreclosure.
HELOC or something else?
If you need one lump sum and want a payment that never changes, a fixed-rate home equity loan is often a better fit. Try the home equity loan calculator with the same amount. If your mortgage rate is high, a cash-out refinance may beat both; the refinance calculator shows the break-even point. To see a plain loan schedule month by month, use the amortization calculator.
This calculator assumes the whole amount is drawn at the start and the rate stays level within each phase. Real HELOCs charge interest daily on a changing balance, so your statements will differ a little. Your lender’s disclosures are the final word on rates, fees and terms.