Understanding HELOCs: Draw Period vs. Repayment Period
A Home Equity Line of Credit (HELOC) is one of the most flexible ways to borrow against your home's equity. The HELOC calculator helps you understand both phases — the draw period when you access funds, and the repayment period when you pay it back — so there are no surprises when the bill arrives.
How a HELOC Works
During the draw period (typically 5–10 years), you can borrow up to your approved credit limit, repay, and borrow again — similar to a credit card. Payments during this phase are usually interest-only, which keeps monthly costs low. During the repayment period (typically 10–20 years), the line closes and you pay back the full outstanding balance with interest. This payment shock is the most common HELOC planning mistake.
Your Home Equity and LTV
Home equity is the part of your home you own outright: current value minus everything you still owe on it. Loan-to-value (LTV) is the flip side — your balance as a share of the home's value. A $400,000 home with a $220,000 mortgage has $180,000 of equity and a 55% LTV. Equity grows two ways: each payment pays down principal, and the home may rise in value. Early in a mortgage the paydown is slow — in the first month of a $400,000, 30-year loan at 7%, about $2,333 of the $2,661 payment is interest and only about $328 reduces the balance — so in the first years appreciation often does more for your equity than your payments do. In a flat or falling market, paydown is the only thing moving it.
Equity matters beyond a HELOC: once your LTV falls to 80% of the original value you can ask to drop PMI, it determines whether you can refinance on good terms, and for most homeowners it is the largest part of their net worth.
How Much Can You Borrow?
Lenders use a Combined Loan-to-Value (CLTV) ratio — typically 80–90% — to determine your maximum HELOC. The formula: (Home Value × max LTV%) − Outstanding Mortgage = Maximum HELOC. For a $400,000 home with a $220,000 mortgage at 85% LTV: ($400,000 × 0.85) − $220,000 = $120,000 available. Borrowing $50,000 of that would take your combined LTV from 55% to 67.5% — the calculator warns you if the amount you enter exceeds the limit.
HELOC vs. Home Equity Loan
A HELOC offers flexibility — borrow only what you need, when you need it — but usually carries a variable rate tied to the prime rate. A home equity loan delivers a lump sum at a fixed rate with predictable payments. HELOCs are better for ongoing expenses like renovation projects; home equity loans suit one-time large purchases where you want payment certainty.
Tax Deductibility
HELOC interest may be tax deductible when funds are used to substantially improve the property securing the loan. The 2017 Tax Cuts and Jobs Act eliminated deductibility for other uses (debt consolidation, tuition, etc.). If you plan to use funds for home improvement, keep detailed records; consult a tax professional for your specific situation.
Risks to Consider
HELOCs are secured by your home — defaulting puts your home at risk. Variable rates mean payments can rise if the prime rate increases. Plan for the repayment-period payment jump by calculating it now (this calculator does that). If you can't comfortably handle the repayment payment, borrow less or choose a home equity loan with fixed payments instead.