How Payments Are Calculated for HELOCs

Learn what factors affect your HELOC payment

Two children play on a tire swing in front of their home.
•••

Hill Street Studios / Getty Images

A home equity line of credit (HELOC) is a type of revolving credit that allows you to borrow against your home’s equity. Your home serves as collateral, just as it does for your mortgage. The money can be used for anything from debt consolidation to home renovations and other major expenses.

If you’re considering opening a HELOC, understand how you will pay it back. Learn how HELOCs work, how payments are calculated, how to pay them back, and more.

Key Takeaways

  • A HELOC starts with a draw period, during which you can borrow from the credit line.
  • During the repayment period, you repay your balance with principal and interest payments.
  • Some lenders require smaller monthly payments of only interest during the HELOC draw period.
  • HELOCs usually have variable interest rates, meaning your rate and monthly payment can change over time.
  • You can refinance a HELOC into a new debt, such as a new HELOC, a home equity loan, or even your mortgage.

How HELOCs Work

Every HELOC is broken into two phases: the draw period and the repayment period.

During the draw period of your HELOC, you can borrow up to the credit limit for any purpose. Like with a credit card, you can spend on your line of credit again after you repay the balance. The draw period on your HELOC may vary by lender, but they often last for about 10 years.

Once the draw period on your HELOC ends, you’ll enter into the repayment period. During this time, you can no longer borrow against your HELOC. You’ll make minimum monthly payments until the borrowed amount is repaid, just like any other loan. The repayment period of the HELOC varies by lender and is typically about 10 to 20 years.

HELOCs are secured by your home. The amount you can borrow generally depends on the value of your home and the amount of equity you currently have, among other factors. Your monthly payments will be based on the amount you’ve actually used and your interest rate, not on the total line of credit.

What’s Included in a HELOC Payment?

Like other loans, your HELOC payment includes two components: principal and interest. The principal is the amount of the HELOC that you’ve used. The interest is the additional money you pay to borrow the funds.

HELOCs usually have variable interest rates, meaning the rate can change over time and is based on a particular rate index. As market rates increase, the rate on your HELOC—and, therefore, your monthly payments—increase as well. On the other hand, as market rates decrease, your interest rate and payments may also decrease.

Whether you’re in your draw period or repayment period will affect what is included in your HELOC payment.

Some HELOCs allow for interest-only payments during the draw period, before you are required to start repaying the principal and interest in the repayment period.

How To Calculate HELOC Payments

The amount of your HELOC payments depends on whether you’re in the draw period or the repayment period. Let’s look in more detail at how payments are calculated during the different phases of your line of credit.

Draw Period

During the draw period of your HELOC, you’ll have a variable interest rate and a payment based on the amount you’ve used from your credit line. The repayment terms will depend on your lender. Some may require you to pay accrued interest and a percentage of your principal balance, similar to a credit card.

In many cases, the minimum payments during your draw period won’t be enough to repay the loan. In fact, some lenders only require interest payments during the draw period. However, the principal balance will accrue interest during that time, and if your principal increases, so will your interest payments.

You can pay off the principal during the draw period, even though you aren’t required to. Some borrowers may prefer to pay off the full HELOC as soon as possible so they can use it again during the draw period.

Repayment Period

In the repayment period, you’ll no longer be able to borrow from the line of credit. Instead, the focus turns to repaying what you’ve borrowed, along with interest.

Some lenders require a balloon payment at the end of the draw period, at which point, you’ll have to repay the entire outstanding balance. However, most lenders have an extended repayment period, during which time you’ll repay your HELOC like you would a loan.

Your payments during the repayment period are amortized and based on your principal and interest. The amount you’ll pay will include your accrued interest as well as enough of the principal balance to have your entire line of credit paid off before the end of the repayment period.

Remember that because HELOCs usually have variable interest rates, your payment amount can change over time. If the interest rate for the index your HELOC is tied to increases, then your rate and your monthly payment will increase as well. HELOC rates can change as often as once per month.

It’s also important to note that if you sell your home during either your draw period or repayment period, you’ll likely have to repay your full balance immediately. Remember, your HELOC is secured by your home. If you no longer own the asset securing the debt, the lender will probably want their money back.

How To Pay Off a HELOC

When you get to the repayment period of your HELOC, you’ll usually have two options: You can choose to repay the balance, or you can refinance to change the payment terms.

Make Your Monthly Payments

The most straightforward way to deal with your HELOC repayment period is to simply repay the loan. You can repay it right away or based on the schedule your lender has set. Because of the variable rate, your payments could increase or even become unaffordable, which may require you to consider refinancing.

Refinance

When your HELOC draw period ends, you could refinance several different ways. They include:

  • Refinancing into a new HELOC with a new draw period, and possibly interest-only payments
  • Refinance with a fixed-rate HELOC
  • Refinance with a home equity loan, which is a term loan that often has a fixed interest rate and fixed monthly payments
  • Refinance into your mortgage, which would require taking out a new mortgage to pay off your existing mortgage and HELOC

The Bottom Line

A HELOC can be an excellent tool to help you pay for home repairs or renovations, consolidate high-interest debt, send a child to college, and more. But they also have some risks, including the variable interest rate and the fact that your credit line is secured by your home.

As with any other type of debt, it’s important to understand the terms of your HELOC before finalizing the agreement. Make sure you’re well-versed on your HELOC’s credit limit, repayment terms, interest rate, and more.

Frequently Asked Questions (FAQs)

When do payments start on a HELOC?

The repayment period typically begins about 10 years after you take out a HELOC. But you may have to make payments on your HELOC as soon as you borrow money. However, these payments will be smaller than in the repayment period. Depending on your lender, you may only have to make interest payments or interest with only a portion of the principal during the draw period.

Does a HELOC have monthly payments?

HELOCs generally require monthly payments once you’ve started using the credit line. Your monthly payment will depend on whether you’re in the draw period or repayment period, and could include only interest or both interest and principal.

How much can I borrow on a HELOC?

The amount you can borrow on your HELOC generally depends on two main factors: the value of your home and your equity in the home. It will also depend on other factors, such as your credit score and income. Lenders generally only allow borrowers to take out up to a certain amount of equity. The more equity you have in your home, the more you can borrow.

Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!

Article Sources

  1. Consumer Financial Protection Bureau. “What You Should Know About Home Equity Lines of Credit.”

  2. Consumer Financial Protection Bureau. “Home Equity Loans and Home Equity Lines of Credit.”