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A HELOC (Home Equity Line of Credit) is a revolving credit line secured by your home's equity — the difference between your home's market value and the outstanding balance on your mortgage. Like a credit card, you can borrow, repay, and borrow again up to your credit limit during the draw period. HELOCs are commonly used for home improvements, debt consolidation, education expenses, and large purchases.

During the draw period, most HELOCs require interest-only payments. The formula is: Monthly Payment = Outstanding Balance × (Annual Rate ÷ 12). For example, if you drew $50,000 at 8.5% APR, your monthly draw-period payment is $50,000 × (0.085 ÷ 12) = $354.17. Because you're not paying down principal, your balance stays the same throughout the draw period — which is why repayment-period payments can be significantly higher.

After the draw period, the outstanding balance is fully amortized over the repayment period. The formula is the standard amortization formula: P × r / (1 − (1 + r)^−n), where P is the outstanding balance, r is the monthly rate, and n is the number of repayment months. This produces a fixed monthly payment that covers both interest and principal, reducing the balance to zero by the end of the repayment period.

Payment shock refers to the significant increase in your monthly payment when a HELOC transitions from the interest-only draw period to the fully amortized repayment period. For example, a $50,000 HELOC at 8.5% may require $354/mo during a 10-year draw period, but $618/mo during a 20-year repayment period — a 75% increase. To prepare: budget for the higher repayment payment before the transition, consider making principal payments during the draw period to reduce the balance, and refinance if rates have dropped significantly.

A HELOC is a revolving credit line with a variable rate — you borrow as needed, pay interest only during the draw period, and repay the balance over the repayment period. A home equity loan disburses a lump sum at closing with a fixed interest rate and fixed monthly payments from day one. HELOCs offer more flexibility; home equity loans offer payment certainty. HELOCs are better for ongoing or uncertain expenses; home equity loans are better for one-time large purchases.

Most lenders require you to maintain at least 15–20% equity in your home after taking out the HELOC. The maximum credit line is typically calculated as: (Home Value × 85%) − Outstanding Mortgage Balance. For example, if your home is worth $400,000 and you owe $250,000 on your mortgage, the maximum HELOC is ($400,000 × 0.85) − $250,000 = $90,000. Your actual credit line may be lower based on income, credit score, and lender policies.

HELOC interest may be tax deductible if the funds are used to buy, build, or substantially improve the home securing the loan, subject to the $750,000 mortgage debt limit under the Tax Cuts and Jobs Act of 2017. Interest on HELOCs used for other purposes (debt consolidation, vacations, general expenses) is generally NOT deductible. Consult a tax advisor about your specific situation, as tax rules are complex and subject to change.

If you make only interest-only payments during the draw period, your outstanding balance at the end of the draw period equals your original draw amount — none of the principal has been reduced. This means your repayment-period payments will be based on the full drawn balance. Making extra principal payments during the draw period reduces your balance and lowers your repayment-period payments. The amortization schedule in this calculator shows the scenario where you make interest-only payments during the draw period.