How Is HELOC Interest Calculated?

A home equity line of credit (HELOC) is one financing option for a significant home project or other large expense. A HELOC allows you to borrow against your home equity. Similar to a mortgage or home equity loan, your home is collateral for the credit line. 

HELOCs are a popular choice because they often have low interest rates and provide flexible financing. You can borrow from it as needed up to the total of your HELOC during the draw period—10 years is typical—and repay it during the repayment period, which can be as long as 20 years.

HELOCs often come with variable rates, which change over time, but fixed-rate HELOCs are also available. Here’s some insight into how HELOC rates work and what to know about these flexible financing options. 

In this guide:

• How are HELOC interest rates determined?
• How is HELOC interest calculated?
• FAQs

How are HELOC interest rates determined?

Two factors determine most HELOC rates: 

A benchmark index. Lenders often use the prime rate as guidance for setting their rates. The prime rate is typically aligned with the federal funds rate, determined by the Federal Open Market Committee.

A borrower’s creditworthiness. When determining your HELOC rate, lenders consider your credit, debt, and income. In general, borrowers with solid credit and relatively low debt receive the best rates.

Our research showed the lowest HELOC rate was 5.63% as of September 2022. But averages may be higher or lower as you read this, and you may see different rates depending on the lender you choose and your creditworthiness. 

How is HELOC interest calculated?

Your HELOC interest rate will differ based on whether you opt for a fixed-rate or variable-rate HELOC. With a fixed-rate HELOC, you may be able to lock in a fixed interest rate for a certain period or your entire HELOC term. The benefit is more consistent payments than a variable-rate HELOC. 

However, fixed-rate HELOCs are less common than variable-rate HELOCs, and lenders’ rules may differ. For instance, some may allow you to convert to a fixed-rate HELOC only after borrowing a certain amount against your credit line. Others may only permit a set number of fixed-rate draws before switching your HELOC to a variable rate. So it can be challenging to calculate how much you’ll pay in interest charges over time. 

With a variable-rate HELOC, your interest rate could change every month, depending on your lender. Nobody can predict how rates will change, so determining your total interest costs over the repayment period is almost impossible.

However, you can calculate your interest-only payments month-to-month, which can be helpful if your rate changes monthly. (Many lenders only require interest payments during your HELOC’s draw period—often 10 years.) Here’s a simple calculation:

(HELOC balance x Daily interest rate) x Number of days in month = Total monthly payment

To determine your daily interest rate, divide your APR by the number of days in the year. For example, if your APR on a HELOC is 7.81%, your daily interest rate is 0.00021 (7.81% / 365).

So if your HELOC balance is $30,000, your total monthly interest payment would be around $195 during a 31-day month:

($30,000 x .00021) x 31 = $195.30

When your draw period ends, you’ll enter the HELOC repayment period, paying principal and interest each month. The amount you pay toward each will fluctuate over time as your HELOC balance decreases. The math can get complicated, but you can better understand your payment breakdown by viewing a sample amortization schedule from your lender. 

FAQs

How is interest calculated on a HELOC vs. a mortgage?

With most mortgages, interest is calculated monthly, meaning your lender divides your total APR by 12 (months per year) to determine your periodic interest rate. But with a HELOC, interest is often calculated daily. 

How is interest calculated on a HELOC vs. a home equity loan?

Many home equity loans have fixed interest rates, while HELOCs are more likely to have variable interest rates. Like a mortgage, interest on home equity loans is calculated monthly, while interest on a HELOC is often calculated daily.  

How will my interest payments change if I make another withdrawal from my HELOC?

If you borrow additional funds during your draw period, your interest payments will likely increase. So if your 7.8%-rate HELOC balance jumps from $30,000 one month to $35,000 the next, your monthly interest payments might increase from around $195 to about $228.