- 6 min read
- Your payment can change when a HELOC exist the drawing phase and enters the repayment phase.
- During the HELOC drawing phase, you only have to pay the interest due.
- But in the repayment phase, your payment increases to repay the principal in the remaining loan term.
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A home equity line of credit (HELOC) can provide financial flexibility when you want to tap into your home’s equity. But it’s smart to know how to calculate a HELOC payment.
Your HELOC monthly payment can change significantly when it exits the draw period and enters the repayment period, especially if you have a variable interest rate.
Take the time to better understand a HELOC rate compared to the prime rate, how lenders structure HELOCs, and how to calculate a HELOC payment.
Getting Qualified for a HELOC
A home equity line of credit (HELOC) is a type of revolving credit secured by your home, which serves as collateral. A HELOC enables you to borrow against the equity accrued in your home. It works similarly to a credit card in that you are granted access to funds up to a particular limit you can borrow from as you need it.
With a HELOC, the specific amount of credit you are approved for is determined by your home’s appraised value. The lender may calculate your credit limit by taking a percentage of your home’s appraised value (such as 75%) and subtracting the balance you owe on your existing mortgage. Your lender will also examine your ability to repay the loan by closely looking at your debts, income, financial obligations, and credit history.
How HELOCs Work: Draw Period Vs. Repayment Period
During the “draw period,” which often spans 10 years, you can borrow cash, and you are only obligated to make minimum payments on the interest you owe. You are also permitted to pay off what you borrow in full. Additionally, you won’t start making payments on your HELOC until after you begin borrowing against your line of credit.
Once your draw period expires, the repayment period starts. At this time, you’ll likely be required to repay both your principal and interest in full or over a set time, which can last five to 20 years.
Some HELOCs only have minimum payments each month. If you only pay the minimum payment due each month, by the end of the term, you will have to repay the remaining balance as a lump sum single payment, called a “balloon payment.”
Note that your HELOC interest rate isn’t fixed. Your rate is a preset variable rate based on current prime rates (plus a margin) that can rise or fall over time. Fortunately, you only will pay interest on the cash you borrow during the draw period.
How To Calculate A HELOC Payment During The Draw Period
Curious how to calculate a HELOC payment during the draw phase? Thankfully, plenty of free HELOC calculators can be found online that come in handy here. But it’s also wise to know how to do the math yourself.
“Let’s say your interest rate is currently at 6% during the draw period,” says Dennis Shirshikov, a strategist with Awning.com and a professor of economics and finance with City University of New York. “You can determine your daily interest rate by dividing by 365.”
In this example, your daily interest rate would be 0.00016438356.
Next, calculate your average daily balance for the month (the amount you’ve borrowed, for which the principal remains unpaid month to month over the draw period, unless you choose to start repaying this principal). Assume your average daily balance is $50,000.
“You would then multiply $50,000 by your daily rate, 0.00016438356, and then multiply by the number of days in the month,” he adds.
($50,000 x 0.00016438356) x 30 = 246.45
Hence, in this scenario, your monthly interest-only payment during the draw period would be $246.45. If the month had 31 days, it would be $254.66. (Remember: You only repay interest, not principal, during the draw period.)
A quicker way to get a rough estimate of what you’ll pay monthly in interest during the draw period is to multiply your current balance by your current interest rate and divide by 12. Here’s the math using the previously mentioned example:
$50,000 x 0.06 ÷ 12 = $250
Remember that your interest rate can change monthly, so these numbers aren’t set in stone.
Case in point: If your rate spikes to 7% a month from now, your monthly interest-only payment will jump to about $292.
“The difference here is $42, which may not seem like a lot. However, that depends on your HELOC’s current balance. In this hypothetical, a 1% increase in interest represents a nearly 17% increase in your monthly payment,” says Shirshikov.
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How To Calculate A HELOC Payment During The Repayment Period
During your repayment period, remember that you will be required to make both principal and interest payments on the outstanding balance. The amount of your payment will depend on your principal balance, the current interest rate, and your loan’s terms.
Don’t forget that your HELOC interest rate during the repayment period is also variable, unless you have a HELOC with a fixed rate (more on that later). So your monthly payments could jump significantly if your interest rate increases.
As before, you can use an online HELOC repayment calculator to determine what you will owe monthly in principal and interest during the repayment period.
“Let’s say you have borrowed $50,000, and your repayment period is 60 months. But your current interest rate jumps from 6% to 7% during the repayment period. If so, your monthly payment would increase to about $990, up $740 from the approximately $250 you were paying during the draw period when your rate last averaged 6%,” explains Joshua Haley, founder of Moving Astute.
Using the same previous example, if your rate during the repayment period jumps to 8%, your monthly HELOC payment would increase to nearly $1,014 – an extra $24 dollars more per month than if your rate had stayed at 7%.
How To Protect Yourself From Rising HELOC Rates
There are three ways to safeguard yourself from variable HELOC interest rates that can increase and become unaffordable.
One option is to choose a fixed-rate HELOC right from the start, which offers a fixed interest rate for the entire term of the loan. This option comes with a few disadvantages, however. Lenders typically charge a higher interest rate for a fixed-rate HELOC than the initial low rate they charge for a traditional HELOC. You may have a stricter borrowing limit with a fixed-rate HELOC, too. And you could end up paying more in fees than you would for a traditional HELOC.
A second option is to convert your traditional HELOC to a fixed-rate HELOC, which the lender may allow before you close on the loan or during the draw period. If your traditional HELOC includes an initial fixed interest rate phase during the draw period, it’s best to convert it before this phase ends.
“However, borrowers must usually meet certain requirements to qualify for a convertible HELOC, such as having a good credit score and a strong financial history,” Haley cautions.
A third choice is to refinance your traditional HELOC to a new convertible fixed-rate HELOC or a fixed-rate home equity loan.
“Borrowers should opt for fixed-rate HELOCs if they believe that interest rates will continue to rise,” adds Shirshikov. “Keep in mind that borrowers with a variable rate HELOC may benefit if rates fall – especially if they decrease before the repayment period begins.”
How much can HELOC payments increase?
A traditional home equity line of credit (HELOC) has a variable interest rate. That means your rate can go up or down at any time during your loan’s term unless you have an initial fixed rate that eventually expires.
If your rate increases, your monthly payments will also rise. If your rate drops, you will pay less per month. For example, say your current balance is $50,000, and your current interest rate is 6%. That means you’ll pay around $250 in interest only right now during the draw period.
If your rate happens to remain at 6% during your repayment period (which, let’s say, lasts 60 months), your new monthly payment (including principal and interest) would jump to about $967. If, during your repayment period, your rate increases to 7%, your new monthly principal and interest payment would climb to $990.
Can you refinance a HELOC in the repayment phase?
Yes. You can refinance a HELOC during the repayment period. You may want to choose this option to get a lower interest rate or to extend the repayment period. But you will have to pay closing costs and fees. You can refinance your traditional HELOC to a new convertible fixed-rate HELOC or a fixed-rate home equity loan.
Can you pay off a HELOC early?
Yes. You are allowed to repay your outstanding balance on a HELOC at any time. You can do this by making extra payments each month or year or refinancing the loan. However, depending on your loan's terms, you may be charged a penalty for early repayment based on a percentage of your balance or a minimum fee. Consequently, carefully weigh all your options before committing to repaying your HELOC early