Understanding Home Equity Lines of Credit (HELOCs)
A Home Equity Line of Credit (HELOC) is a flexible borrowing option that allows homeowners to access funds based on their home's equity. Our HELOC calculator helps you estimate payments during both the draw period (when you can access funds) and repayment period (when you pay back what you borrowed).
How HELOCs Work
HELOCs typically have two distinct phases:
- Draw Period (5-10 years): Borrow as needed up to your credit limit, with interest-only payments
- Repayment Period (10-20 years): Pay back principal plus interest through fixed monthly payments
Key HELOC Features:
- Variable interest rates - Typically tied to the prime rate plus a margin
- Interest-only payments during draw period (minimum payments)
- Reusable credit - As you repay, funds become available again
- Potential tax benefits - Interest may be tax deductible (consult a tax advisor)
- Lower rates than credit cards or personal loans
HELOC Payment Calculations Explained
- Interest-only payment = (Amount Borrowed × Interest Rate) ÷ 12 months
- Repayment payment = Amortized payment over repayment period
- Total interest includes both draw and repayment periods
- Assumes full amount borrowed at start of draw period for calculation
Typical HELOC Terms & Requirements
- • Credit limits: 75-90% of home value (minus mortgage)
- • Draw periods: 5-10 years
- • Repayment periods: 10-20 years
- • Interest rates: Prime + 0.5% to 2%
- • Minimum credit score: 680+
- • Maximum loan-to-value: 80-90%
HELOC Frequently Asked Questions
What's the difference between a HELOC and home equity loan?
A HELOC is a revolving credit line with variable rates and flexible borrowing, while a home equity loan provides a lump sum with fixed rates and payments.
Are HELOC payments tax deductible?
HELOC interest may be deductible if used for home improvements (consult a tax professional). The Tax Cuts and Jobs Act changed some rules about HELOC deductions.
What happens if I only make minimum payments?
During the draw period, minimum payments cover only interest. When repayment begins, you'll owe principal plus interest, which may significantly increase your payment.
Can I convert my HELOC to a fixed rate?
Some lenders offer fixed-rate conversion options for portions of your HELOC balance, locking in rates for specific amounts.
HELOC Tips & Best Practices
- Use HELOCs for investments that maintain or increase value (like home improvements)
- Avoid using HELOCs for discretionary spending or depreciating assets
- Consider making principal payments during draw period to reduce future payments
- Shop multiple lenders - rates and terms vary significantly
- Have a repayment plan before borrowing