How Do I Calculate My HELOC Payment?

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Whether you’re interested in improving your home with renovations, consolidating debt or tackling a larger purchase, tapping into your home equity can make it more affordable. One way to access the money your home is worth is with a HELOC loan. If you’re wondering what a HELOC loan is and what the repayment process looks like, here’s what you need to know.

What Is a HELOC Loan?

“HELOC” stands for “home equity line of credit.” It’s a lending product that allows you to access a certain percentage of your home’s equity, or the difference between what you still owe on your mortgage and what your home’s current market value is. With a HELOC, you can use the value of the equity as a form of revolving secured credit and borrow against it as needed, as long as you have credit available.

Like most revolving credit accounts, you’ll make monthly payments based on the amount you borrow and your interest rate. While this may make it seem like HELOCs don’t offer anything more than what you can get with a credit card, that isn’t the case.

With a HELOC, your home serves as collateral. As a result, the associated interest rate is typically much lower than what you’d get with unsecured credit lines. For example, while the average credit card interest rate was 16.17% at the beginning of 2022, the average for HELOCs was under 5%.

However, unlike traditional revolving credit accounts, a HELOC won’t necessarily remain open forever. Usually, there’s a draw period – typically around 10 years – during which you can tap the credit line. You’ll also make payments during that time, though they may be interest-only. After that, you’ll enter the repayment period. That may last between 10 and 20 years, depending on the terms of your HELOC.

How Is the Interest Rate on My HELOC Loan Calculated?

Exactly how the interest rate is calculated on your HELOC depends on your loan issuer and the arrangements in your contract. Some HELOCs have fixed interest rates, while others have variable interest rates. Some rely on compound interest, while others are simple.

However, all HELOC interest rates are impacted by the prime rate, which is largely dictated by the Federal Reserve rate (federal funds rate). Usually, the prime rate is about three percentage points above the federal funds rate.

Lenders typically tack on a bit more on top of the prime rate. That ensures they have funds to cover administrative costs and can address the risk level of each borrower. When the risk is higher – such as for borrowers with lower credit scores – increased interest rates serve to offset the greater chance of default.

What Will My HELOC Payments Be?

The size of your HELOC payment depends on the amount you borrow – not the size of your credit line – and your associated interest rate. During the draw period, when you’re usually only paying interest, multiply your average daily basis for that month by your monthly interest accrual rate (annual interest rate divided by 12) to see how much you’ll owe.

Once you start the repayment period, you’ll need to cover interest and a portion of your principal. Most HELOCs come with a set payment (barring interest-based adjustments on HELOCs with variable rates) during this period, which can be a little challenging to calculate on your own. While you can divide the principal at the time repayment is required by the number of payments during the repayment period and add that to the interest for that first month, that is only a rough estimate. Instead, you may want to use a HELOC repayment calculator online to get a more reliable figure.