What Is a HELOC?

A HELOC (Home Equity Line of Credit) is a revolving line of credit secured by your home equity, similar to a credit card but with much lower interest rates. Unlike a home equity loan that gives you a lump sum, a HELOC lets you borrow, repay, and borrow again during the draw period — giving you maximum flexibility.

HELOCs have two phases: the draw period (typically 10 years) when you can borrow up to your limit and make interest-only payments, and the repayment period (typically 10–20 years) when the line closes and you repay principal plus interest.

Most lenders allow a combined LTV (your first mortgage plus the HELOC) of up to 85% of your home's appraised value. HELOCs have variable rates tied to the prime rate, so your payment can change when the Fed adjusts rates.

How HELOC Payments Are Calculated

Draw period (interest-only): Payment = Balance × (Annual Rate ÷ 12). On a $60,000 HELOC at 9%: $60,000 × 0.0075 = $450/month.

Repayment period: Uses standard amortization — M = P[r(1+r)^n]/[(1+r)^n−1]. The same $60,000 at 9% over 20 years = $540/month.

Note: Because HELOCs have variable rates, your actual payments will change as the prime rate changes. This calculator uses a fixed rate for illustration.

HELOC vs Home Equity Loan: Key Differences

Feature	HELOC	Home Equity Loan
Rate type	Variable (prime-based)	Fixed
Disbursement	Draw as needed	Lump sum
Draw period payment	Interest only	N/A
Best for	Ongoing/uncertain costs	One-time large expense
Payment predictability	Low (rate changes)	High (fixed payment)
Closing costs	Low (often none)	2–5% of loan amount

Common HELOC Uses

Good Uses

✓ Home renovations (increases home value)
✓ College tuition (spread over multiple years)
✓ Emergency fund backup
✓ Small business investment
✓ Medical expenses

Risky Uses

✗ Everyday living expenses
✗ Vacations or luxury purchases
✗ Paying off unsecured debt (transfers risk to home)
✗ Speculative investments

Frequently Asked Questions

How is HELOC interest calculated?

Interest accrues daily on your outstanding balance: Balance × (Annual Rate ÷ 365) × days. Your monthly payment is the sum of daily interest charges. Only pay interest on what you actually draw.

What happens at the end of the draw period?

The line closes and enters repayment. Your full balance is amortized over the repayment period. Payments jump significantly — plan ahead to avoid payment shock.

Can I convert a HELOC to a fixed rate?

Some lenders offer rate-lock features that convert all or part of your balance to a fixed rate. This provides payment certainty while keeping unused credit available.

What credit score do I need for a HELOC?

Most lenders require 680+, with 720+ for the best rates. You also typically need at least 15–20% equity and a debt-to-income ratio below 43%.

Is HELOC interest tax deductible?

Only if proceeds are used to buy, build, or substantially improve the home. Consult a tax advisor for your specific situation.

Can my lender freeze or reduce my HELOC?

Yes. During economic downturns, lenders can reduce your credit limit or freeze draws if your home value drops significantly. This happened widely during 2008–2009.

Compare alternatives: Home Equity Loan Calculator for fixed-rate lump sum, Refinance Calculator for cash-out refinance, and Extra Payment Calculator to compare paying down your mortgage instead.

HELOC Calculator