Heloc Calculator

Understanding the HELOC Calculator

A Home Equity Line of Credit (HELOC) is a revolving line of credit, similar to a credit card, that is secured by your home. A HELOC Calculator helps you understand the potential payments during both the "draw period" (when you can borrow money) and the "repayment period" (when you must pay back the principal and interest).

How It Works: Draw Period vs. Repayment Period

HELOCs have two distinct phases:

• Draw Period: This is typically the first 5-10 years of the HELOC. During this time, you can borrow money up to your credit limit. Payments are often "interest-only," meaning you are only required to pay the interest that accrues on your outstanding balance. This results in very low monthly payments.
• Repayment Period: After the draw period ends, you can no longer borrow money. The loan enters the repayment phase, which typically lasts 10-20 years. Your monthly payment is now fully amortized, meaning it includes both principal and interest. This causes a significant increase in the payment amount, which is often referred to as "payment shock."

How Payments Are Calculated

Interest-Only Payment (Draw Period):

Monthly Interest-Only Payment = (Amount Borrowed × Annual Interest Rate) / 12

Principal & Interest Payment (Repayment Period):
This is calculated using the standard amortization formula on the remaining balance at the end of the draw period.

M = P [ r(1+r)^n ] / [ (1+r)^n – 1 ]

• M = Monthly Principal & Interest Payment
• P = Principal balance at the start of repayment
• r = Monthly interest rate (annual rate / 12)
• n = Number of payments in the repayment period

Practical Example

Imagine you borrow $50,000 from a HELOC with a 10-year draw period at 6% interest, followed by a 20-year repayment period.

• During the 10-year draw period: Your interest-only payment would be ($50,000 * 0.06) / 12 = $250 per month.
• At the start of the 20-year repayment period: Assuming the interest rate is still 6% and you haven't paid down any principal, your fully amortized payment would jump to approximately $358.22 per month. This is the "payment shock."

Frequently Asked Questions (FAQ)

What's the difference between a HELOC and a Home Equity Loan?

A HELOC is a revolving line of credit you can draw from as needed, often with a variable interest rate and an interest-only draw period. A Home Equity Loan is a fixed-term installment loan where you receive a lump sum upfront and make fixed principal and interest payments from the start.

Are HELOC interest rates fixed or variable?

Most HELOCs have variable interest rates tied to a benchmark index like the Prime Rate. This means your payment can change over time, even during the interest-only period. Our calculator assumes a fixed rate for simplicity, but you should be prepared for potential rate changes.

What is "payment shock"?

Payment shock is the significant increase in your monthly payment that occurs when a HELOC transitions from the interest-only draw period to the fully amortized repayment period. It's crucial to budget for this change.

Can I pay more than the interest-only amount during the draw period?

Yes, and it's a very good idea! Paying extra towards the principal during the draw period will reduce your balance, lower your future amortized payments, and save you a significant amount of interest over the life of the loan.