A home equity line of credit or HELOC loan is like a credit card – one that’s secured by your house as collateral. You get access to a line of credit that you can borrow against, up to a predetermined credit limit. Repaying it includes paying both the loan principal and the monthly interest on the outstanding balance. This blog will help you understand the HELOC amortization schedule so that you can make an informed decision before applying for a loan

HELOC amortization schedule

Most HELOC lenders allow you to make interest-only payments, based on the outstanding loan balance and interest rate, for a set period of time. After this draw period, a repayment period begins when you need to pay back the loan amount. 

As opposed to a fixed-rate home equity loan, a HELOC has fluctuating interest rates that determine the HELOC payment over the life of the loan.

It’s always a good idea to calculate your HELOC payments before finalizing your loan options. Bankrate offers a reliable HELOC payment calculator to help you calculate the complete HELOC amortization schedule for paying off the loan – including the amount of interest you’ll pay and the loan balance.

You can easily determine the payments during the draw phase, for paying down the balance at a certain rate, and the payments during the repayment period. 

How are the HELOC repayments structured?

first lien heloc rates

When you apply for a variable-rate home equity line of credit, you will be able to borrow funds based on the equity you have in your home. The loan lender arrives at your HELOC limit by looking at your loan-to-value (LTV) ratio and remaining mortgage balance. 

HELOC repayments work in two phases, based on the point of time of the loan. After the draw period, the repayment period happens whereby you have to pay back the principal as well as the interest on the HELOC.

A HELOC has a draw period of usually 5-10 years during which you can borrow against the credit line. As mentioned before, the draw is usually interest-only charges on the amount of money you’ve borrowed. You don’t have to pay the loan principal amount at this point. Once the draw ends, you enter the repayment period which lasts 10-20 years. During this time, you must repay what you’ve borrowed. Keep in mind that while the draw period is based on an adjustable rate, the repayment period is often fixed-rate.

Although the draw is typically interest-only, you can always make additional payments. This will not only decrease the amount you’ll have to pay back (and the monthly payments) but also make your line of credit available once more. If you amortize HELOC smartly, you can use it as a tool for managing your cash flow – borrowing money and paying it back when you are able to.

Draw period

During the draw phase, you can withdraw money from the HELOC using a credit card, check, or bank transfer. The length of the draw period may vary depending on the loan agreement. However, it’s usually five to 10 years.

You are only obligated to make the minimum interest payment during the draw period on the outstanding balance, not the principal. As your outstanding debt changes from month to month, so will your minimum monthly payment. Basically, you have the option to borrow money during the draw period and repay it later.

Repayment period

As the repayment period begins, you can no longer access the HELOC funds. This is the time you have to pay both the outstanding balance and the interest. The balance amount is amortized over the remaining period. Your monthly payment stays constant during this period. 

Read more: How long does HELOC take?

Paying off a HELOC

calculate the loan funding

Your loan lender will look at a number of variables, including your credit history, credit score, and the value of your home to grant you access to a HELOC. The good news is that you only owe the amount you utilize. That is to say if you have taken a loan of $50,000, but only utilize $25,000, you will technically only owe $25,000. And, you’ll only have to make interest payments on that amount during the draw period.

For example, if you’ve taken a $50,000 loan for 120 months at the rate of 6.10%, your monthly payments would be $557.62.

In the case of a conventional home equity loan, you’ll get a lump sum of $50,000 on which you’ll pay the interest through monthly payments.  

If your HELOC loan agreement doesn’t have prepayment penalties, it’s a good idea to make extra monthly payments on your principal so that paying all at once doesn’t become a drain on your finances. 

Read more: Should I lock in my HELOC rate?

Last thoughts

To repay a home equity line of credit, the borrower must make a monthly payment to the lender. Interest-only payments are calculated using the loan balance and interest rate. Loan payments are amortized so that the monthly payments remain the same throughout the repayment period, but the percentage of the amount that goes towards the principal increases as the outstanding mortgage balance decreases.

If you want to know exactly how much your HELOC will cost per month, or during the life of the loan, you should understand the HELOC amortization schedule to help you with the loan payoff.

Read more: Can I use my 401k to buy a house?

A HELOC amortization schedule guide for you was last modified: January 22nd, 2023 by Ramona Sinha
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Wow, man, when I thought I understood HELOCs, you guys make it more complicated