What Is a HELOC?
A home equity line of credit (HELOC) is a revolving credit line secured by your home equity. Unlike a home equity loan, which provides a lump sum at a fixed rate, a HELOC lets you draw funds as needed up to a credit limit. Most HELOCs have a variable interest rate tied to the prime rate plus a margin set by your lender.
Draw Period vs. Repayment Period
During the draw period (commonly 5 to 10 years), you can borrow against the line and make interest-only payments on the amount drawn. During the repayment period (commonly 10 to 20 years), the line closes and you repay the balance with fixed monthly principal-and-interest payments. The shift from interest-only to principal-and-interest can substantially increase your monthly payment.
How Much Equity Can You Access?
Most lenders allow you to borrow up to 85% of your home's appraised value, minus your outstanding mortgage balance. On a $500,000 home with a $300,000 mortgage, the maximum HELOC at 85% CLTV is ($500,000 x 0.85) - $300,000 = $125,000.
HELOC Interest Rate Risk
Because most HELOCs carry variable rates, your payments can increase if the prime rate rises. Before drawing on a HELOC, model what your payment would look like if rates rose by 2 to 3 percentage points and confirm you could sustain that payment.
HELOC vs. Home Equity Loan vs. Cash-Out Refinance
A home equity loan provides a lump sum at a fixed rate -- better when you know the exact amount needed and want payment certainty. A HELOC offers flexible, as-needed borrowing -- better for ongoing or uncertain expenses like a multi-phase renovation. A cash-out refinance replaces your entire first mortgage, which only makes sense if current rates are at or below your existing rate; otherwise you would be raising the rate on your whole loan balance just to access a smaller amount of cash.
Common HELOC Calculator Mistakes
Budgeting only for interest-only draw-period payments. The payment jumps substantially when the repayment period begins and principal is added -- model both phases, not just the initial one.
Treating the full credit limit as available cash. Lenders can reduce or freeze a HELOC if home values drop or your financial situation changes, even mid-draw-period.
Frequently Asked Questions
Can I pay off a HELOC early? Most HELOCs allow early payoff without penalty, though some charge an early-closure fee if you close the line within the first few years. Check your specific agreement.
What happens if I sell my home with a HELOC balance? The HELOC balance is paid off from sale proceeds at closing, the same as your first mortgage, before you receive any remaining equity in cash.
The Inputs, Field by Field
Home value and mortgage balance. Your home's current appraised value and what you still owe on the first mortgage. The difference, within the lender's limit, is the equity you can borrow against.
Combined loan-to-value (CLTV) limit. The share of your home's value all loans combined may reach, commonly up to 85%. This caps your available line, as the worked example above illustrates.
Interest rate and draw amount. Most HELOCs carry a variable rate tied to prime plus a margin. Enter the amount you actually plan to draw, not the full limit, since interest accrues only on what you borrow.
How to Read Your Results
The calculator shows your maximum line and an estimated payment, but the payment is the number to scrutinize. Draw-period payments are often interest-only and look affordable; the payment can jump sharply when the repayment period begins and principal is added. Because the rate is usually variable, also model what the payment becomes if rates rise two or three points, and confirm you could sustain it.
Assumptions and Limitations
This calculator estimates borrowing power and payments using the values you enter; actual limits depend on your credit, income, and the lender's appraisal. It does not predict future rate movements on a variable line, annual fees, or the possibility that a lender freezes or reduces the line if home values fall. Because a HELOC is secured by your home, treat the results as an educational estimate and borrow cautiously.
More Frequently Asked Questions
Is HELOC interest tax-deductible? Interest may be deductible when the funds are used to buy, build, or substantially improve the home securing the line, subject to IRS limits and itemization. Interest on funds used for other purposes generally is not. Confirm with a tax professional.
What is the difference between a HELOC and a home equity loan? A home equity loan is a lump sum at a fixed rate with fixed payments. A HELOC is a revolving line you draw from as needed, usually at a variable rate. Choose the loan for a known one-time cost and the line for ongoing or uncertain expenses.
Related Calculators and Guides
Understand the product in depth with our guide to how a HELOC works. If you are weighing a HELOC against replacing your first mortgage, compare it with the refinance calculator, and factor the full picture of ownership costs using the hidden costs of homeownership calculator and the mortgage calculator.