The interest you’ll pay on a home equity line of credit (HELOC) is typically calculated by multiplying the daily interest rate by the average daily balance for the billing cycle. (This is called the average daily balance method.) The lower your daily balance, the less interest you’ll pay.
The variable nature of a HELOC interest rate is a big factor in this equation. Many HELOCs allow for interest rate adjustments once a month — so the amount of interest you pay varies from month to month, based on both your balance owed and your rate.
U.S. households had more than $396 billion in outstanding HELOC balances at last count, so plenty of homeowners are looking to minimize the amount of interest they pay. If you’re one of them, here’s a rundown of how interest is calculated on a home equity line of credit so you can take steps to minimize your costs whenever possible.
Key Points
• HELOC interest is usually calculated using the average daily balance method.
• The HELOC interest rate is determined by adding a lender margin to the prime rate.
• Interest rates on HELOCs are variable and often change monthly.
• Early payments and additional payments can reduce overall interest paid.
• Interest is charged only on the amount borrowed from the credit line.
Basics of HELOC Interest Rates
To understand how does HELOC interest work and how much interest you’re being charged, it’s helpful to know the basics of how HELOC interest is calculated. Home equity line of credit interest rates are usually variable, so they can move up or down based on market conditions. Your monthly payment changes as a result. There is usually an interest rate ceiling and floor on a HELOC, which govern the highest and lowest the interest rate can go on your loan — so there are some controls built into this process.
How are HELOC rates calculated? The interest rate you pay is made up of two parts: the prime rate and a lender’s profit margin.
Your HELOC Interest Rate = Prime Rate + Lender Margin
The lender’s margin stays the same throughout the life of your loan, but the prime rate can fluctuate based on market conditions.
HELOC Interest Calculation Methods
There are a few different ways your lender can calculate interest, though the average daily balance method is the one you’ll most likely see.
Average daily balance: An average daily balance calculation involves finding the average daily balance for the month and then multiplying it by the interest rate. This is the most common HELOC interest calculation method.
Adjusted balance method: The adjusted balance is where the lender subtracts any payments you made during the period to calculate interest charges from the “adjusted balance.”
Previous balance method: In this method, the lender uses the amount owed at the beginning of the period to calculate interest charges.
Recommended: What Is a HELOC?
Factors Affecting HELOC Interest Calculations
Several factors affect HELOC interest calculations. These include your annual percentage rate (APR), the extent to which you use your credit line, and whether you’re in the HELOC’s draw or repayment period.
APR
As mentioned previously, one of the defining characteristics of a HELOC is the variable APR, which can change over the course of the term. For many HELOC lenders, the interest rate can be adjusted once per month. But you still want to obtain the lowest possible interest rate at the outset of your line of credit.
Your personal qualifications and the attributes of your property and loan are the biggest factors in determining your APR. Some of these include:
• Credit history: Your credit score and credit history factor into the interest rate your lender will offer you. A better credit score translates into a better interest rate on your loan.
• Line amount: How large your HELOC credit line is will affect your interest rate.
• Equity: Generally, the more equity you leave in your home, the better interest rate you’re eligible for.
• Occupancy: An owner-occupied property typically gets a lower HELOC interest rate than an investment property, although some people do use HELOCs to fund investment properties because they think they can use a HELOC to build wealth.
Of course, it’s recommended to always shop around for a HELOC to ensure you find your best available rate.
Recommended: HELOC vs. Home Equity Loan
Credit Utilization
Lower charges on your HELOC create lower interest charges because with a HELOC, you only pay interest on what you borrow. A HELOC payment calculator can help you estimate what your monthly payment would be on your HELOC based on how much of the credit line you have used and your interest rate.
Draw vs. Repayment Period
With many HELOCs, there is a draw period and a repayment period. The draw period is where your minimum payment covers the interest charged on the loan. The repayment period is where you pay principal and interest in installment payments.
When it comes to the interest charges during the draw vs. the repayment period, the calculation is the same, but the interest rate may be different. The main difference is the principal doesn’t go down if you’re making interest-only payments during the draw period. Some borrowers may also have a fixed interest rate when they enter the repayment period.
Sample HELOC Interest Calculations
It’s helpful to look at the process of calculating HELOC interest rates and see a couple examples to understand how it works. Here’s a complete breakdown of the most common method for calculating HELOC interest, the average daily balance. Yes, it’s a lot of math — but if you have a HELOC, your lender runs the numbers for you and sends you a monthly bill.
Step 1: Find the Average Daily Balance
Add each day’s balance together, then divide by the number of days in the billing cycle.
Average daily balance = Total of daily balances / Days in the billing cycle
Example 1: You have a $10,000 balance for each of the 30 days of the billing cycle.
Average daily balance = ($10,000 X 30 days) / 30 days
Average daily balance = $10,000
Example 2: You have a $10,000 balance for two days into the billing cycle and then pay it off. Average daily balance = ($10,000 + $10,000) / 30 days
Average daily balance = ($20,000) / 30 days
Average daily balance = $666.67
Step 2: Find the Daily Periodic Rate of Your HELOC
To find the daily periodic rate of your HELOC, divide the APR on your statement by 365.
Daily periodic rate = APR/365
Example: Your APR is 9.49%
Daily periodic rate = 9.49%/365
Daily periodic rate = .026%
Step 3: Find the Daily Interest Charge
You’ll find the daily interest charge by multiplying the average daily balance by the daily periodic rate.
Daily interest charge = Average daily balance X daily periodic rate
Example 1: $10,000 average daily balance with a .026% daily periodic rate.
Daily interest charge = $10,000 X .026%
Daily interest charge = $2.60
Example 2: $666.67 average daily balance with a .026% daily periodic rate.
Daily interest charge = $666.67 X .026%
Daily interest charge = $.17
Step 4: Find the Total Interest Charges for the Billing Cycle
Multiply the daily interest charge by the number of days in the billing cycle. For this example, we’ll use 30.
Total interest charges = Daily interest charge X Days in the billing cycle
Example 1: $10,000 average daily balance
Total interest charges = $2.60 X 30
Total interest charges = $78
Example 2: $667.67 average daily balance
Total interest charges = $.17 X 30
Total interest charges = $5.10
In this side-by-side comparison, the borrower who paid off the balance after two days saved over $70 in interest costs for the month.
Strategies to Minimize HELOC Interest Costs
Paying less interest is a smart move if you can swing it. If you need to use your HELOC to finance a large expense, keep these tips in mind to help you save on interest.
Make purchases toward the end of the billing cycle. With the daily balance interest calculation, you want to minimize the number of days you’re paying interest on a purchase. If possible, make purchases with your HELOC toward the end of your billing cycle and make payments shortly thereafter.
Pay earlier in the billing cycle. Since the interest is calculated daily based on the money you still owe, paying it earlier in the billing cycle can reduce the amount of interest you’ll pay. And if you can pay down the principal (as in example 2, above), even better.
Make extra payments. Extra payments reduce the principal, which reduces how much interest you’ll pay.
Convert to a fixed-rate loan. Converting your HELOC into a fixed-rate loan could lower your interest costs if you can lock in a lower interest rate. And even if you can’t, converting to a fixed rate protects you from further rate increases and ensures you have a predictable payment amount from month to month going forward.
Recommended: How HELOCs Affect Your Taxes
Comparing HELOC Interest to Other Borrowing Options
Here’s how a HELOC stacks up against home equity loans, personal loans, and credit cards.
Home Equity Loan
This is a different type of home equity loan that offers a fixed interest rate. Like a HELOC, it uses your home’s equity as collateral, but unlike a HELOC, with a home equity loan you receive your funds in a lump sum upfront and start repaying the principal, plus interest, immediately.
If you’re comparing interest rates on a HELOC vs. home equity loan, you’ll typically see lower interest rates in HELOCs initially, but over the years, a HELOC can adjust many times, whereas a home equity loan will always have the same interest rate.
Personal Loan
A personal loan usually has a higher interest rate than either HELOCs or home equity loans. However, your home isn’t used as collateral on the loan, which is a big upside. In early 2025, the average interest rate for personal loans was over 12%.
Credit Cards
Credit cards have significantly higher interest rates than either HELOCs or personal loans. Average credit card interest rates in early 2025 are over 21%. They’re very flexible, but shouldn’t be relied on as a lending tool because of the high interest rates.
The Takeaway
Paying less interest on your HELOC is a smart move for your finances. If you know how is a home equity line of credit interest calculated, you’ll understand how much you’re paying for borrowing money on a HELOC and use smart strategies to pay less. You might also give yourself a head start by paying more than the interest-only payment during the draw period, so that by the time you enter the repayment period, you’ve chipped away at your balance and lowered your payment amount.
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
FAQ
How often does a HELOC interest rate change?
HELOCs are typically variable-rate loans, and while it’s up to the lender to determine how often they change, the rate can change each month. Some HELOCs offer the option to lock in a certain amount borrowed, and the portion you’ve locked becomes a fixed-rate loan with a repayment schedule.
Can I deduct HELOC interest on my taxes?
There are a few scenarios where you can deduct HELOC interest on your taxes. If you use the funds to buy, build, or improve your residence, the interest is tax deductible. However, you would need to itemize your deductions, so consult with a tax advisor. This deduction may change after the 2025 tax year — another good reason to speak with an advisor.
What’s the difference between simple and compound interest for HELOCs?
The daily balance method used by HELOCs is considered simple interest. Compound interest is where interest is charged on top of interest, which isn’t a common way of computing interest for HELOCs. All of the specifics about your HELOC — including your interest rate, how often the variable rate may change, and your rate floor and ceiling, among other things — should be spelled out in your HELOC agreement.
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