On a line of credit, interest works like this: it accrues each day only on the balance you’ve actually drawn, at a variable rate that equals the U.S. Prime Rate plus a margin your lender sets based on your credit profile. With the Prime Rate at 6.75% in early 2026, most borrowers end up somewhere between roughly 7% and 15% all-in, depending on credit, income, and whether the line is secured by your home.1Federal Reserve Bank of St. Louis. Bank Prime Loan Rate (MPRIME) The approved limit itself costs you nothing until you borrow against it.
Prime Rate Plus a Margin
Nearly every line of credit uses a variable rate tied to the Prime Rate, which tracks the Federal Reserve’s federal funds rate. Your lender adds a margin on top. If Prime is 6.75% and your margin is 4%, your rate is 10.75%. When the Fed moves rates, your line adjusts automatically with no renegotiation. The margin, however, is locked when you open the account and stays put for the life of the line.
That mechanic cuts both ways. A string of Fed cuts lowers your payment without you doing anything. A string of hikes raises it the same way.
Lifetime Rate Caps on Home-Secured Lines
Federal law requires every variable-rate consumer credit contract secured by a home to include a maximum interest rate that can apply over the life of the loan.2eCFR. 12 CFR 1026.30 – Limitation on Rates That ceiling should appear in your HELOC agreement; if you can’t find it, ask before signing. Unsecured personal lines of credit don’t carry the same federal cap, so whatever your contract says is the only protection you have on those products.
How the Daily Charge Is Calculated
Lenders use a daily periodic rate: your APR divided by 365 (some lenders use 360).3Consumer Financial Protection Bureau. What Is a Daily Periodic Rate on a Credit Card A 10.75% APR divided by 365 gives a daily rate of about 0.0295%. Each day, that rate is applied to your outstanding balance, and the daily charges are added up at the end of your billing cycle to produce the month’s interest.
A worked example makes it concrete. Carry a $10,000 balance at 10.75% for a 30-day month and you’ll pay roughly $2.95 per day, about $88.50 for the month. Pay $5,000 down on day 15 and your daily charge drops to about $1.47 for the back half of the cycle. That daily recalculation is why a line of credit rewards aggressive paydowns in a way a term loan doesn’t.
Simple Interest vs. Daily Compounding
During the draw period, most home equity lines use simple interest: the lender charges interest on principal only. Credit cards and some unsecured lines compound daily, meaning yesterday’s interest is added to the balance before today’s interest is calculated. Over a large balance held for years, compounding adds up to real money. Your loan agreement spells out which method applies, and it is worth reading before you sign.
Federal law requires lenders to disclose how finance charges are calculated and when they apply before you open an open-end credit account.4eCFR. 12 CFR 1026.6 – Account-Opening Disclosures If the disclosure isn’t clear, that’s a reason to ask questions, not sign through them.
What You Actually Pay Each Month in the Draw Period
The draw period is the window when you can borrow, repay, and borrow again up to your limit. On a HELOC, it typically runs three to ten years. Most lenders require only interest payments during this phase, so there’s no obligation to reduce principal.
The interest-only payment math: multiply your balance by your annual rate and divide by 12. A $45,000 balance at 8.3% comes to about $311 a month. Any amount you pay above that goes straight to principal, which immediately shrinks the next day’s interest charge. The trap is comfort: borrowers who pay only the minimum for years can hit the end of the draw period with the full balance still owed.
Fixed-Rate Lock Options
Some HELOCs let you convert a slice of your variable-rate balance into a fixed rate with a set repayment term, effectively carving out a small fixed-rate loan inside the larger line. Lenders typically allow two to five active locks at once with minimums around $2,000 to $5,000. This is useful if you’ve drawn a large sum and want to stop worrying about rate moves on that portion while keeping the rest of the line flexible.
When Repayment Begins, the Payment Jumps
Once the draw period ends, the line closes to new borrowing and the account amortizes over a set repayment term, commonly 10 to 20 years. The daily interest math stays the same, but your monthly payment now includes principal, which is where the shock lands.
A borrower who paid $311 a month on a $45,000 balance during the draw period could suddenly owe $500 or more once principal payments kick in. The exact figure depends on the rate, remaining balance, and length of the repayment term. Run the amortization before your draw period ends so the first repayment-period statement isn’t a surprise.
Balloon Payment Risk
Some lines are structured so that minimum draw-period payments don’t fully cover accruing interest, or the repayment term is too short to amortize the full balance. Either way, you end up owing a lump sum at the end. Federal law requires lenders to warn about this in the initial disclosures, including a worked example built on a $10,000 balance that shows how minimum payments would leave a balloon.5eCFR. 12 CFR 1026.40 – Requirements for Home Equity Plans If you can’t find that disclosure, ask the lender directly whether a balloon is possible under your terms.
What Drives the Margin You’re Offered
The margin is where lenders price your risk. Four inputs do most of the work:
- Credit score. Higher scores earn thinner margins. A 780 borrower might see a 1% margin on a product where a 680 borrower is quoted 5% or more.
- Collateral. Secured lines backed by home equity price well below unsecured personal lines, because the lender’s recovery options are better.
- Combined loan-to-value ratio. On a HELOC, lenders add your existing mortgage balance to the new credit line and divide by the appraised home value. Fannie Mae caps that combined ratio at 90% for primary residences with subordinate financing, and the closer you sit to the ceiling, the wider your margin.6Fannie Mae. Eligibility Matrix
- Debt-to-income ratio. Fannie Mae’s guidelines range from 36% on manually underwritten loans up to 50% through the automated system, and individual lenders set their own limits around that.7Fannie Mae. B3-6-02, Debt-to-Income Ratios
Fees That Stack on Top of Interest
Interest is the biggest cost, but it isn’t the only one. Home equity lines in particular bring a set of fees worth pricing out before you compare offers:
- Annual fee. Often $25 to $100 or higher, charged whether or not you draw.
- Appraisal fee. Roughly $300 to $450 at origination to establish your home’s value.
- Early closure fee. Closing within the first two or three years can trigger a flat fee of up to $500.
- Inactivity fee. Some lenders charge a small fee if the line sits unused.
- Rate-lock fee. A one-time charge some lenders apply each time you convert a portion to a fixed rate.
Fees vary widely, and some lenders waive them to win the business. Ask for the full fee schedule alongside the rate quote. A thinner margin paired with heavy annual and closure fees can cost more over a few years than a slightly higher margin on a no-fee line.