Home Equity Line of Credit (HELOC) Calculator

Published ·3 min read Expert verified
Written by Calbrea
Reviewed by Jasmine Grainger

HELOC Explained

A HELOC is a revolving line of credit that allows homeowners to borrow against the equity in their homes. Unlike a traditional mortgage, where you receive a lump sum of money upfront, a HELOC gives you access to a predetermined credit limit that you can draw from as needed.

HELOC payments are typically divided into two phases: the draw period and the repayment period. During the draw period, which usually lasts for 5-10 years, you can borrow from the line of credit and make interest-only payments. Once the draw period ends, the repayment period begins, and you are required to pay back both the principal and interest on the remaining balance over a set term, typically 10-20 years.

Terms to Remember:

  • Current Balance: The amount of money you owe on your home equity line of credit right now.
  • Initial Balance: The starting amount of money available to borrow when you first open your home equity line of credit.
  • Outstanding Balance: The total amount of money you still owe on your home equity line of credit, including any borrowed funds and accrued interest.
  • Introductory Interest Rate: A special, usually lower, interest rate offered by the lender for a limited time at the beginning of the home equity line of credit. These rates are usually in effect for a limited time, typically six months to a year.
  • Interest Rate: The percentage charged by the lender on the borrowed funds, which determines the cost of borrowing.
  • Draw Amount: The specific amount of money you choose to borrow from your home equity line of credit.
  • Draw Period: The time frame during which you can borrow money from your home equity line of credit, typically several years.
  • Repayment Period: The period during which you must repay the borrowed funds and any accrued interest, typically after the draw period ends.
  • Annual Fee: A yearly fee charged by the lender for maintaining the home equity line of credit account.
  • Minimum Draw Amount: The lowest amount of money you are allowed to borrow in a single transaction from your home equity line of credit.
  • Simple Interest: Interest calculated only on the initial principal amount borrowed, without taking into account any additional charges or fees.
  • Variable Interest Rate: An interest rate that can change over time. In the context of most HELOC's it is Prime Interest Rate + Margin = Variable Interest Rate
  • Prime Interest Rate: The interest rate that banks charge their most creditworthy customers, often used as a benchmark for setting variable interest rates on loans.
  • Prime plus Margin: The interest rate charged on a loan, calculated by adding a margin to the prime rate.
  • Margin: Typically how much a lender is charging you, at a given time.

Examples of HELOC Uses

Let's look at a couple of examples to illustrate how HELOC payments can vary based on different scenarios

In this example, the monthly payment for a $30,000 outstanding balance with a 5% interest rate and a 20-year loan term would be approximately $208.33. You can compare this payment to a SBA Loan to grow your business.

Tips for Managing HELOC Payments

  • Budget Wisely: Make a budget that includes your HELOC payments as a fixed expense. It helps you plan your finances and ensures you've got enough funds each month.
  • Set Up Auto-Pay: Consider automating your HELOC payments from your bank account. It keeps you on time, dodging late fees, and maintains your credit score.
  • Watch Interest Rates: If your HELOC has a variable rate, keep tabs on interest rate changes. They can affect your monthly payments, so be ready for any ups and downs.
  • Use Funds Wisely: Treat your HELOC as a form of debt. Some choose to spend it on investments like a business idea or projects with potential returns like a kitchen remodel, rather than unnecessary expenses. Make sure your HELOC contract doesn't prevent you from using the funds how you intend.

HELOC Payment FAQs

  • Can I pay off my HELOC early?

    Yes, you can pay off your HELOC early. However, it's important to check with your lender to ensure there are no prepayment penalties or fees.

  • Are HELOC payments tax-deductible?

    In some cases, the interest paid on a HELOC may be tax-deductible. However, since tax laws can vary, it's best to consult with a tax professional for specific advice related to your situation.

  • Can I use a HELOC to consolidate debt?

    Yes, many homeowners use HELOCs to consolidate high-interest debt into a single, lower-interest payment. This can help save money on interest and simplify monthly payments.

  • Can I use a HELOC for investment purposes?

    Yes, some individuals use their HELOCs to invest in real estate or other investments. However, it's important to carefully consider the risks and potential returns before using your home equity for investments.

Remember our online calculators are for convenience. Consult with professionals for personalized advice.