How it works
1. How much you can borrow
Lenders cap the combined balance of all loans on the home at a percentage of its appraised value, called the combined loan-to-value ratio (CLTV):
Maximum line = home value × max CLTV − existing mortgage balance
CLTV = (mortgage balance + HELOC amount) ÷ home value
2. Draw-period payment
During the draw period (often 10 years) most HELOCs require only interest on what you have borrowed. The calculator assumes you draw the full amount on day one and keep it outstanding for the whole draw period, so it shows the highest interest-only payment for that amount; drawing gradually would cost less:
Interest-only payment = balance × annual rate ÷ 12
3. Repayment-period payment
When the draw period ends you can no longer borrow, and the balance is paid off over the repayment period (often 20 years) with a standard amortizing payment:
M = B × r(1 + r)n / ((1 + r)n − 1)
Here B is the balance, r is the monthly rate and n is the number of repayment months. Total interest is the interest-only payments plus the repayment payments minus the amount borrowed. The rate is held constant, although most HELOC rates are variable.
Worked examples
$500,000 home, $300,000 mortgage, 85% CLTV, $100,000 draw at 8.5%, 10-year draw / 20-year repayment
Maximum line: $500,000.00 × 85% − $300,000.00 = $125,000.00. Drawing $100,000.00 brings the CLTV to 80.0%. Draw-period payment: $708.33 a month, interest only. Repayment-period payment: $867.82 a month. Total interest over 30 years: $193,277.58 ($85,000.00 during the draw period and $108,277.58 during repayment). Drawing only $40,000.00 instead would cut the payments to $283.33 and $347.13.
$400,000 home, $180,000 mortgage, 80% CLTV, $50,000 at 9%, 5-year draw / 15-year repayment
Maximum line: $140,000.00. CLTV after the draw: 57.5%. Payments: $375.00 interest-only, then $507.13 during repayment. Total interest: $63,783.99.
Watch out for payment shock
The jump from interest-only payments to full principal-and-interest payments can be large. In the main example the payment rises by $159.49 a month, from $708.33 to $867.82, even though the rate never changes. If rates rise during the draw period, the jump is bigger. Plan for the repayment payment from day one, or pay principal during the draw period to shrink the balance early.
HELOC rates are usually variable
Most HELOCs charge the prime rate plus a margin, so your rate and payment move whenever the prime rate changes. Ask about:
- Rate caps: a lifetime maximum rate and any limits on how much the rate can change at one time.
- Introductory rates: a low teaser rate for the first 6–12 months that later resets higher.
- Fixed-rate options: some lenders let you lock part of your balance at a fixed rate.
To test the risk, rerun the calculator with a rate two or three points higher.
HELOC vs. home equity loan vs. cash-out refinance
- HELOC: a revolving line you draw from as needed. You pay interest only on what you use, the rate is usually variable, and closing costs are low. It suits projects paid in stages, such as a renovation.
- Home equity loan: a lump sum at a fixed rate with fixed payments from the start. It is predictable and suits one-time expenses.
- Cash-out refinance: replaces your first mortgage with a larger one. It can make sense if new mortgage rates are at or below your current rate. Otherwise you give up a low rate on your whole balance. Compare with our refinance calculator.
Costs and fees
HELOCs may come with an appraisal fee, origination fee, annual fee, inactivity fee or an early-closure fee if you close the line within a few years. Fees raise the true cost of borrowing. Our APR calculator shows how fees translate into an annual percentage rate.
Using equity wisely
Your home secures a HELOC, so missing payments can lead to foreclosure. Interest may be tax-deductible only when the money is used to buy, build or substantially improve the home that secures the loan, and only if you itemize. Borrowing against your home to pay for vacations or everyday spending turns short-term costs into long-term secured debt. Using a HELOC to consolidate high-rate credit card debt can save interest, but only if you avoid running the cards back up.
Step-by-step: applying for a HELOC
- Estimate your equity. Use a recent comparable sale or an online estimate, then run this calculator at 80% and 85% CLTV to see a realistic range.
- Check your credit and debt-to-income ratio. Many lenders want a score in the high 600s or above and a total debt-to-income ratio under about 43%. The new HELOC payment counts toward that ratio.
- Compare at least three lenders. Look at the margin over prime, the introductory rate and how long it lasts, rate caps, annual fees, closing costs and early-closure fees.
- Expect an appraisal. The lender's appraised value, not your estimate, sets the final limit.
- Read the repayment terms. Confirm the draw period, the repayment period, whether a balloon payment is possible and whether the lender can freeze or reduce your line if home values fall.
After closing, draw only what you need. Interest is charged only on the outstanding balance, so a large unused line costs nothing beyond any annual fee. Because the line stays open, a HELOC can also serve as a backup reserve for large, irregular expenses.
Frequently asked questions
How much can I borrow with a HELOC?
Most lenders allow a combined loan-to-value ratio of 80%–90%. Multiply your home's value by that percentage and subtract your mortgage balance. Your credit score, income and debt-to-income ratio also affect the final limit.
What is CLTV?
Combined loan-to-value is the total of all loans secured by the home (first mortgage plus HELOC or home equity loan) divided by the home's appraised value. Lower CLTV means less risk for the lender and often a better rate.
What happens when the HELOC draw period ends?
You can no longer borrow, and you must start repaying principal and interest over the repayment period, usually 10–20 years. Payments typically rise sharply at this point. Some lenders instead require a balloon payment of the full balance, so read your agreement.
Are HELOC payments interest-only?
Many HELOCs require only interest during the draw period, but you can usually pay principal too. Paying principal early lowers the later repayment payment and total interest.
Is HELOC interest tax-deductible?
Under current federal law, interest may be deductible only if the funds are used to buy, build or substantially improve the home securing the loan, you itemize deductions, and total mortgage debt is within IRS limits. Consult a tax professional.
Does the calculator account for variable rates?
No. It assumes one constant rate for the life of the line. Because most HELOC rates are variable, rerun it with higher rates to see how your payment could change.
HELOC or home equity loan: which is cheaper?
HELOCs often have lower closing costs and charge interest only on what you draw, while home equity loans offer a fixed rate. If you need the full amount at once and value predictable payments, a home equity loan may be the better fit.