Home equity loans versus HELOCs
A home equity loan is a lump sum at a fixed rate, amortized like a second mortgage — this calculator models it exactly. A HELOC is a revolving line, usually with a ten-year draw period of interest-only payments followed by a repayment period of fifteen to twenty years.
For a HELOC in repayment, enter the balance, your current rate and the years left in the repayment period. For a HELOC still in the draw period, enter the balance you expect to carry into repayment — interest-only payments never reduce that balance.
The payment shock at the end of a draw period
The most damaging surprise in home equity borrowing is the jump from interest-only to fully amortizing payments. A $55,000 balance at 9.1% costs about $417 a month in interest only, and roughly $560 a month once principal repayment begins over fifteen years — and far more on a shorter repayment period.
Paying principal during the draw period, even a few hundred a month, both softens that jump and cuts total interest sharply.
Variable rates and your home as collateral
Most HELOCs float with the prime rate, so your payment moves with it. Model a rate one or two points above today's to see whether the payment still fits your budget.
Both products are secured by your home, which is why rates are lower than unsecured debt — and why falling behind carries far more serious consequences than a missed credit card payment. That is a strong argument for prioritizing payoff on a rate-adjustable second lien.
Common mistakes
Treating draw-period interest-only payments as progress, ignoring an annual fee or early-closure fee on the line, and forgetting that interest is only tax deductible when the funds were used to buy, build or substantially improve the home.