How Do I Calculate Home Equity Line of Credit Payback?
Many home equity lines of credit are split into two phases: the draw phase and the repayment phase. Typically, the draw phase lasts for 5 to 10 years, during which you can tap your HELOC, and your only obligation is to pay the interest that accrues each month. But, once that comes to an end, you enter the repayment phase: you make monthly payments that cover the principal and interest so that at the end of the period, you have paid off the HELOC. To figure your monthly payments during the repayment period, you need to know your outstanding balance, interest rate and repayment period.
Calculate the annual interest rate on your HELOC by adding your interest rate index to the margin. The interest rate index is a measure of the market interest rate. Banks often use the 1-year constant-maturity Treasury securities, the Cost of Funds Index, or the London Interbank Offered Rate as the index for HELOCs. The margin varies depending on the lender and your creditworthiness. For example, if your HELOC uses the COFI, which is at 3.9 percent, and your margin is 1.8 percent, your interest rate is 5.7 percent.Step 2
Divide your annual interest by 100 to convert to a decimal. In this example, divide 5.7 by 100 to get 0.057.Step 3
Divide the annual interest rate as a decimal by 12 to find your monthly interest rate. Continuing the example, divide 0.057 by 12 to get 0.00475.Step 4
Calculate the number of monthly payments during your repayment period by multiplying the number of years by 12. For example, if you have a repayment period of 10 years, multiply 10 by 12 to find you make 120 repayments.Step 5
Add 1 to the monthly interest rate as a decimal. For example, if your monthly rate is 0.00475, add 1 to 0.00475 to get 1.00475.Step 6
Raise the result to the negative power of the number of payments you make. On a calculator, the power function key often looks like "^" or "x^y." In this example, raise 1.00475 to the negative 120 power to get 0.566289118.Step 7
Subtract the result from 1. In this example, subtract 0.566289118 from 1 to get 0.433710882.Step 8
Divide the monthly interest rate as a decimal by the result. In this example, divide 0.00475 by 0.433710882 to get 0.010951996.Step 9
Multiply the result by the balance of your HELOC to figure your monthly payments for the repayment period. Finishing the example, if you owe $150,000, multiply $150,000 by 0.010951996 to find your monthly payment is $1,642.80.
- The Federal Reserve Board: What You Should Know About Home Equity Lines of Credit
- The Federal Reserve Board: Consumer Handbook on Adjustable Rate Mortgages
- Hough Chou: How to Calculate Mortgage Loan Payments, Amortization Schedules (Tables) by Hand or Computer Programming
- Bankate.com: Loan Calculator
- Not all HELOCs use a repayment period. Instead, some require you to pay the entire outstanding balance when the draw phase comes to an end.
- HELOCs have adjustable interest rates, which means your monthly payment will change if interest rates rise or fall. As interest rates change, you must recalculate your monthly payback.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."