How a HELOC Works
A Home Equity Line of Credit (HELOC) is a revolving credit line secured by your home. The lender establishes a maximum credit limit based on your home's value, your existing mortgage balance, and a combined loan-to-value (CLTV) ratio — typically 80–90%. You can draw from the line as needed, repay, and draw again during the draw period.
Unlike a traditional loan where you receive a lump sum and immediately begin repaying principal and interest, a HELOC separates borrowing from repayment into two distinct phases. This structure gives you flexible access to funds while keeping initial payments lower — but it means total interest cost depends heavily on how much you draw and when.
Draw Period vs. Repayment Period
The draw period — typically 5 to 10 years — is when you can access the credit line. Most HELOCs require only interest payments during this phase, calculated on the outstanding drawn balance. This keeps monthly payments low but means your balance does not decrease unless you voluntarily pay principal.
At the end of the draw period, the line closes to new advances and the repayment period begins — typically 10 to 20 years. The outstanding balance converts to an amortizing loan: each monthly payment covers interest first, then principal, until the balance reaches zero. Because the same balance now amortizes over a shorter period, the repayment payment is often significantly higher than the draw period payment.
| Phase | Duration | Payment Type | Balance Change |
|---|---|---|---|
| Draw Period | 5–10 years | Interest-only (typically) | Flat (unless you pay principal) |
| Repayment Period | 10–20 years | Principal + Interest | Decreases to $0 |
HELOC vs. Home Equity Loan
Both products let you borrow against home equity, but they work differently. A HELOC is a revolving variable-rate line of credit — flexible, but your rate can change with the prime rate. A home equity loan is a fixed-rate installment loan — predictable monthly payments, but you receive a lump sum regardless of whether you need it all.
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| Rate type | Variable (prime + margin) | Fixed |
| Disbursement | Draw as needed | Lump sum |
| Draw period | Yes — 5–10 years | No |
| Payment predictability | Varies with rate | Fixed throughout |
| Best for | Ongoing or uncertain costs | One-time known expense |
Questions You Might Ask
How is a HELOC credit line calculated?
Lenders multiply your home value by their maximum CLTV ratio — typically 80–90% — then subtract your existing mortgage balance. If your home is worth $500,000, the lender allows 85% CLTV, and you owe $300,000, your maximum credit line is $125,000. Credit score, income, and debt-to-income ratio also affect the approved amount.
What happens at the end of the draw period?
When the draw period ends, the credit line closes and the outstanding balance enters the repayment period. Your monthly payment increases because you are now paying both principal and interest on an amortizing schedule. If you have only made interest payments during the draw period, the full drawn balance still remains — plan ahead to avoid payment shock.
Is HELOC interest tax deductible?
Under current tax law (Tax Cuts and Jobs Act of 2017), HELOC interest is deductible only when the funds are used to buy, build, or substantially improve the home securing the loan. Interest on funds used for other purposes — debt consolidation, tuition, discretionary expenses — is not deductible. Consult a tax professional for your specific situation.
Can I pay down a HELOC during the draw period?
Yes — and it's often a smart strategy. Voluntary principal payments during the draw period reduce your balance, which lowers interest charges in both the draw and repayment phases. Because a HELOC is revolving, paying down principal also restores your available credit for future use. There are typically no prepayment penalties on HELOCs.
Methodology
FiscalCalc's HELOC calculator computes the available credit line as home value × max CLTV% − existing mortgage balance. Draw period payments are interest-only: monthly rate × drawn balance. Repayment period payments use the standard amortization formula over the selected repayment term. Interest rate is assumed fixed for illustration; actual HELOCs typically carry variable rates tied to the prime rate. Results are illustrative; actual terms depend on your lender. All calculations run client-side in your browser. Last updated: May 2026.