Understanding the HELOC Structure
A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by your home equity. Unlike a standard home equity loan, a HELOC functions like a credit card: you borrow only what you need, pay it back, and borrow again.
HELOCs consist of two distinct phases:
1. Draw Period: The initial phase (typically 5 to 10 years) where you can borrow funds. Payments are usually interest-only, based on the current balance and variable interest rate.
2. Repayment Period: The final phase (typically 10 to 20 years) where you can no longer draw funds. The remaining balance amortizes into monthly principal and interest payments.
The math is formulated as follows:
$$\text{Interest Rate} = \text{Variable Index Rate} + \text{Lender Margin}$$
$$\text{Draw Phase Monthly Payment (Interest-Only)} = \text{Current Balance} \times \frac{\text{Interest Rate}}{12}$$
$$\text{Repayment Phase Monthly Payment} = \text{PMT}\left(\frac{\text{Interest Rate}}{12}, \text{Repayment Months}, -\text{Balance}\right)$$
Because HELOCs have variable rates, payments can rise significantly if interest rates increase during the repayment phase.