Understanding HELOCs
What is a HELOC?
A HELOC (Home Equity Line of Credit) is a revolving line of credit secured by your home's equity. Unlike a traditional mortgage, you can borrow, repay, and borrow again up to your credit limit during the draw period. HELOCs typically have two phases: a draw period (usually 5-10 years) and a repayment period (usually 10-20 years).
What is a Draw Period?
The draw period is the initial phase of a HELOC when you can borrow money up to your credit limit. During this period, you typically only need to make interest-only (or interest-plus-small-principal) payments, which keeps monthly payments low. You can continue to draw funds during this period, but once it ends, you can no longer borrow additional money.
What Happens When the HELOC Enters Repayment?
When the draw period ends, the HELOC enters the repayment period. You can no longer borrow additional funds, and you must now pay both interest and principal to fully pay off the remaining balance over the repayment term (typically 10-20 years). This causes a significant increase in your monthly payment, often called "payment shock."
Why Do Payments Sometimes Jump a Lot?
During the draw period, you're only paying interest (or interest plus a small principal amount), which keeps payments low. When repayment begins, you must pay both interest and principal to fully amortize the balance over the remaining term. This combination is much higher than interest-only payments. For example, if you have a $100,000 balance and were paying $500/month in interest, you might need to pay $1,200/month in repayment to pay off the balance over 10 years.
Risks of Variable-Rate HELOCs
HELOCs typically have variable interest rates that can change over time. If rates increase, your payments increase too—both during the draw period and repayment period. This can make budgeting difficult and increase your total cost. Always consider how rate changes might affect your ability to make payments, especially when the repayment period begins.
Note: This calculator is for educational purposes only and does not provide personalized financial advice. Actual HELOC terms, rates, and payments may differ. Always consult with a qualified financial advisor or loan officer for advice specific to your situation.
Frequently Asked Questions
Related Tools
Mortgage Calculator
Calculate monthly mortgage payments including P&I, escrow, PMI, and payoff date
Refinance Savings Calculator
Compare your current loan vs a new refinance rate and term to see savings
Loan Repayment Calculator
Calculate monthly payments, total interest, and amortization schedules
Debt Snowball vs Avalanche
Compare debt payoff strategies to see which saves more time and money
Student Loan Payoff Calculator
Compare student loan repayment strategies and income-driven plans
Interest-Only Loan Calculator
Calculate interest-only payments for mortgages and HELOCs