How the Line of Credit Calculator Works
A Home Equity Line of Credit (HELOC) has a unique two-phase structure that affects your payments[citation:4]:
1. Available Credit Calculation
Lenders determine your borrowing limit based on your home equity and a maximum Loan-to-Value (LTV) ratio[citation:7].
Available HELOC Limit = (Home Value × LTV Limit) - Current Mortgage Balance
2. Draw Period (Interest-Only Payments)
During the draw period (typically 10 years), you usually pay only interest on the amount borrowed[citation:4].
Monthly Payment = (Amount Borrowed × Annual Interest Rate) ÷ 12
Example: Borrowing $50,000 at 8% interest: ($50,000 × 0.08) ÷ 12 = $333.33/month
3. Repayment Period (Amortizing Payments)
After the draw period ends, you must repay both principal and interest, causing "payment shock"[citation:4].
Monthly Payment = [r × PV] ÷ [1 - (1 + r)^-n]
Where: r = monthly interest rate, PV = loan balance, n = total payments
Example: $50,000 at 8% over 20 years: Payment increases to $418.22/month
HELOC vs. Home Equity Loan vs. Cash-Out Refinance[citation:4]
| Feature |
HELOC |
Home Equity Loan |
Cash-Out Refi |
| Distribution |
Revolving Line (As needed) |
Lump Sum |
Lump Sum |
| Interest Rate |
Variable (Usually) |
Fixed |
Fixed |
| Best For |
Ongoing projects, emergency funds |
One-time expense (e.g., roof) |
Lowering rate + Cash |
Frequently Asked Questions
What is payment shock in a HELOC?
Payment shock refers to the significant increase in monthly payments when a HELOC transitions from the interest-only draw period to the repayment period where both principal and interest must be paid. This occurs because during the draw period (typically 10 years), you only pay interest on the borrowed amount. When repayment begins, you must pay back the principal as well, often over 20 years, causing payments to increase substantially[citation:4].
How is available HELOC credit calculated?
Lenders calculate your available HELOC credit using this formula:
Available Credit = (Home Value × LTV Limit) - Current Mortgage Balance
Most lenders cap the Combined Loan-to-Value (CLTV) ratio at 80% to 90% of your home's value. For example, if your home is worth $450,000 and the lender allows 85% LTV, the maximum total borrowing would be $382,500. With a $150,000 mortgage balance, you could access up to $232,500 in HELOC credit[citation:4][citation:7].
Are HELOC rates fixed or variable?
Most HELOCs have variable interest rates tied to an index like the Prime Rate. However, some lenders offer a "Fixed-Rate Loan Option" where you can lock in a portion of your balance at a fixed rate for a set term. Variable rates mean your payments can increase if interest rates rise, adding another layer of payment uncertainty[citation:1][citation:4].
What credit score is needed for a HELOC?
Most lenders require a minimum credit score of 620-680 for HELOC approval, but scores of 700+ typically qualify for the best interest rates. Lenders also consider your Debt-to-Income (DTI) ratio, usually requiring it to be under 43%, and your overall credit history[citation:4].
Can I pay off my HELOC early?
Yes, most HELOCs allow early repayment without prepayment penalties. Paying extra toward the principal during the draw period is an excellent strategy to reduce your balance, lower future interest costs, and minimize payment shock when the repayment period begins[citation:4].