What this calculator answers

A home equity line of credit is almost always a variable rate product tied to the prime rate. That means a Federal Reserve hiking cycle can take a comfortable 350 dollar monthly payment and turn it into a 700 dollar monthly payment over the span of 18 months. The HELOC Stress Test runs a 200 basis point rate shock against your current balance and shows you exactly how much your payment, total interest, and payoff timeline change.

How the math works

A HELOC payment in the draw period is typically interest-only, calculated as your balance multiplied by the annual rate divided by 12. So a 50,000 dollar balance at 9 percent costs 375 dollars a month. Shock the rate to 11 percent and that same balance costs 458 dollars a month, an 83 dollar increase that recurs every month until rates fall or you pay down principal. In the repayment period, when the loan amortizes over the remaining term, the impact is even larger because both the interest and the required principal payment grow.

When to use it

• You opened a HELOC during a low-rate period and want to know whether you can afford the payment if rates rise another two percent.
• You are considering tapping a HELOC to fund a home renovation and want to model the worst-case monthly cost before you draw the funds.
• Your draw period is ending and you want to see what the payment will look like once it converts to an amortizing repayment phase.
• You are comparing a HELOC against a fixed-rate home equity loan and need to quantify the interest rate risk you would be taking on.

Common mistakes

• Assuming the rate cap on the loan protects you. Most HELOC lifetime caps are five to six percent above your starting rate, which is enormous in real dollar terms.
• Ignoring that the prime rate has moved more than 200 basis points in 18 months several times in the last 25 years. A 200 bps shock is not a worst case scenario; it is a base case.
• Forgetting that when the draw period ends, your payment can roughly double overnight even if rates stay flat, because you now have to pay principal as well.
• Treating the available credit line as 'free money.' Every dollar drawn becomes a monthly obligation that scales with rates.

A worked example

You have a 75,000 dollar HELOC balance at 8.5 percent in the interest-only draw period. Your current monthly payment is 531 dollars. A 200 basis point shock raises the rate to 10.5 percent and the payment to 656 dollars, a 125 dollar monthly increase that costs you 1,500 dollars more per year for as long as the balance stays high. If you carry that balance for five years, the shock costs you 7,500 dollars in additional interest with nothing to show for it.

Frequently asked questions