How to Calculate a Home Equity Line of Credit Payment
Master HELOC payment calculations. This guide explains how your Home Equity Line of Credit payments are determined and change over time.
A Home Equity Line of Credit (HELOC) provides homeowners with a revolving line of credit, allowing them to borrow funds as needed up to an approved limit. Unlike a traditional loan, funds are not received as a single lump sum. HELOC payments can vary over time.
Key Components of a HELOC Payment
A HELOC payment is determined by several elements. Interest is charged only on the outstanding balance, which is the principal amount currently borrowed, not on the total credit limit.
HELOCs have a variable interest rate, which fluctuates based on market conditions. This rate combines a fixed percentage, called the margin, with an index rate like the U.S. Prime Rate. The margin remains constant, but the index rate can change.
A HELOC has two phases: the draw period and the repayment period. During the draw period (often 5 to 10 years), borrowers can access funds, and payments are often interest-only. After the draw period, the HELOC transitions to the repayment period (typically 10 to 20 years). During this time, new funds cannot be drawn, and payments include both principal and interest.
Calculating Payments During the Draw Period
During the draw period, payments typically cover only the accrued interest on the outstanding balance. Interest is calculated daily based on the daily outstanding balance.
To find the daily interest, divide the annual interest rate by 365 days. Multiply this daily rate by the outstanding balance. For example, with a $20,000 balance and an 8% annual rate, the daily interest rate is 0.08 / 365 = 0.000219. The daily interest charge on $20,000 is $20,000 0.000219 = $4.38.
At the end of the billing cycle, all daily interest charges are summed for the total monthly interest payment. For a 30-day cycle with a consistent $20,000 balance and 8% annual rate, the monthly interest-only payment is approximately $4.38 30 = $131.40. Some lenders may require a minimum payment that includes a small percentage of the principal or a set minimum dollar amount.
Calculating Payments During the Repayment Period
After the draw period, a HELOC enters its repayment phase. Borrowers can no longer draw new funds, and payments include both principal and interest. The outstanding balance at the end of the draw period becomes the principal to be amortized over the remaining term.
These payments are calculated like a traditional mortgage. Each monthly payment repays a portion of the principal and covers interest on the remaining balance. The payment amount depends on the outstanding balance, the interest rate, and the repayment term, which commonly ranges from 10 to 20 years. For example, a $25,000 outstanding balance at 9% interest over a 10-year term results in a monthly payment of approximately $317.
As repayment progresses, the principal portion of the payment increases, and the interest portion decreases. Since most HELOCs retain a variable interest rate, index rate fluctuations will continue to impact the total monthly payment. An increased interest rate will raise the monthly payment to ensure the loan is repaid within the set term.
Understanding Payment Changes
HELOC payments can change due to several factors. The most common cause is a change in the underlying index rate. Since most HELOCs have variable interest rates tied to an index like the Prime Rate, movement in this index directly impacts the borrower’s interest rate and monthly payment.
Taking additional draws during the draw period increases the outstanding balance, leading to higher minimum payments. A larger balance means more interest accrues, increasing the required payment. Conversely, making extra principal payments reduces the outstanding balance, leading to lower future interest charges and potentially reducing subsequent minimum payment requirements.
A significant payment change occurs when the HELOC transitions from the interest-only draw period to the principal and interest repayment period. This shift results in a substantial increase in the monthly payment, as the borrower must now pay down the principal in addition to interest. Lenders typically provide notification before this transition, allowing borrowers time to prepare.