Do You Know How to Calculate Your HELOC Payment?

Do You Know How to Calculate Your HELOC Payment?

Thinking about adding a Home Equity Line of Credit (HELOC) to your financial toolkit but unsure about the payments? You’re not alone. Many people want to know what to expect before they sign on the dotted line. In this guide, we’ll break down a simple way to calculate your HELOC payment using real examples. Let’s get started!

Understanding HELOC

What is a HELOC? A Home Equity Line of Credit (HELOC) is like a mortgage on your house, however, it works more like a credit card. You get a starting balance that you can borrow against, and during the draw period, you can borrow and pay back as much as you like. To clarify, this draw period usually lasts 5 to 10 years.

Example Scenario

Let’s look at an example to see how it works.

Someone wants to move $20,000 of debt to their HELOC because they have credit cards with higher interest rates. They want to know what their payments will be after the first month.

Step-by-Step Calculation of your HELOC Payment

1. HELOC amount: $20,000
2. Interest Rate: Most HELOCs start at Prime. For this example, let’s use an 8.5% interest rate.

Calculating the Interest

• Yearly Interest:
  • $20,000 × 8.5% = $1,700 per year.
• Monthly Interest:
  • $1,700 ÷ 12 = $141.67 per month.

So, the rough monthly payment is about $140. Remember, this is just an estimate. The actual amount can vary slightly each month since interest on a HELOC is calculated daily.

Comparing HELOC Payments to Credit Card Payments

In this case, the person was paying about $600 a month in credit card payments. Of that, $400 was just the interest. By moving everything to a HELOC, they now pay around $140 in interest. This change saves them about $260 per month.

Conclusion

Calculating your HELOC payment can help you understand your financial options better. If you have questions or need more examples, feel free to ask in the comments. We’re here to help!

Download the HELOC Payment Calculator here! 

For more tips and tools, check out our other videos and resources. And remember, the goal is to use debt wisely so it doesn’t use you.