Home Equity Line of Credit (HELOC) Calculator

What is a HELOC?

A home equity line of credit, or HELOC, is a revolving credit line secured by your home. Instead of receiving a lump sum, you are approved for a maximum amount and can borrow from it, repay and borrow again, much like a credit card but at a far lower rate because the house is collateral. Funds are usually accessed by online transfer, special checks or a card linked to the account.

HELOCs have two phases. The draw period, typically 5 to 10 years, is when you can take money out. Most lenders require only interest payments during this time, which keeps the payment low but leaves the balance unchanged. When the draw period ends, the line closes to new borrowing and the repayment period begins, usually lasting 10 to 20 years. The balance is then amortized, and the payment can jump sharply. With the defaults above, a $50,000 balance at 8% costs $333.33 a month during the draw period and $477.83 once repayment starts, an increase of more than 40%.

Most HELOC rates are variable. They are usually set as a margin above the prime rate, which moves with Federal Reserve policy, so both payments can rise or fall over the life of the line. Federal rules require lenders to disclose a lifetime rate cap, and some lenders let you lock part of the balance at a fixed rate. The calculator assumes a constant rate; rerun it at a higher rate to see how sensitive your payment is.

The credit limit depends on your equity and the lender's combined loan-to-value limit, along with your credit score, income and existing debts. Lenders can freeze or reduce a line if home values fall significantly or your finances change, which happened widely during the 2008 housing downturn.

Because the line is secured by your home, missed payments can lead to foreclosure. A HELOC works best for borrowers with stable income who have a plan to repay the balance, not merely to cover the interest.

Draw payment = B × r · Repayment payment = B × r(1 + r)ⁿ ÷ [(1 + r)ⁿ − 1]

B

balance owed when the payment is calculated

r

monthly interest rate (annual rate ÷ 12)

n

months in the repayment period

During the draw period most HELOCs require only the interest on the balance, so the balance does not fall unless you pay extra. At the end of the draw period the balance is amortized over the repayment period, which is why the payment rises.

Costs associated with a HELOC

HELOC closing costs tend to be lower than for a first mortgage or home equity loan, and some lenders waive them entirely. When charged, they can include an application fee, appraisal, credit report, title search, document preparation and recording fees. Lenders that waive fees often require you to keep the line open for a minimum period, commonly three years, or repay the waived costs.

Ongoing fees may include an annual or membership fee, often $50 to $100 during the draw period, transaction fees for each draw, an inactivity fee if you do not use the line and an early-closure fee. Some lines also require a minimum draw at closing.

Because a HELOC's APR excludes many of these charges by law, the calculator's real APR includes the closing costs and annual fees you enter so you can compare offers on the same basis.

Usage and alternatives to HELOC

A HELOC's flexibility makes it a good fit when the total cost of a project is uncertain or will be spent over time. Common uses include:

• Home renovations paid in stages as work progresses; interest may be tax-deductible when the money is used to buy, build or substantially improve the home.
• Consolidating high-interest debt, provided the cards are not run up again and you repay the balance rather than just the interest.
• Education costs spread over several years, after federal student aid options have been considered.
• A backup source of funds for emergencies or irregular income, opened while your finances are strong.
• Bridge financing, such as a down payment on a new home before the old one sells.
• Home equity loan: a lump sum at a fixed rate with a fixed payment from day one. Better when you know the exact cost and want predictability.
• Cash-out refinance: replaces your first mortgage with a larger one. Sensible when current mortgage rates are at or below your existing rate.
• Personal loan: unsecured, so your home is not at risk, but with higher rates and shorter terms.
• 0% APR credit card: useful for smaller amounts that can be paid off before the promotion ends.
• Savings: the cheapest source of money, with no interest or fees, if you can rebuild the balance afterward.

Frequently asked questions

Sources

• Consumer Financial Protection Bureau
• FTC – Home equity loans and home equity lines of credit
• IRS Publication 936 – Home Mortgage Interest Deduction