A home equity line of credit usually has two phases. During the draw period (often 10 years) many lines only require interest. After that, the repayment period begins and you pay principal and interest, often over 20 years.
The example
$50,000 drawn at 8.5% (variable).
- Draw period, interest-only: about $354 a month.
- Repayment over 20 years at the same rate: about $434 a month.
That is about $80 a month more, and the rate can also move in either direction because most HELOCs are variable.
Why it surprises people
During the draw period the balance does not fall unless you pay extra. Ten years of interest-only payments on $50,000 at 8.5% is about $42,500 in interest with the full $50,000 still owed.
Ways to soften the jump
- Pay some principal during the draw period. Even $100 extra a month lowers the later payment.
- Check the exact date your draw period ends and what the new payment will be.
- Ask whether your lender offers a fixed-rate option on part of the balance.
- Compare with a fixed home equity loan or refinance if rates are lower.
Your home is the collateral, so build the repayment payment into your budget well before it starts.
Free tools
- HELOC payment calculator: https://smartbudgetsheets.surge.sh/calculators/heloc-payment-calculator/?utm_source=mataroa
- Home equity calculator: https://smartbudgetsheets.surge.sh/calculators/home-equity-calculator/?utm_source=mataroa
- Loan calculator: https://smartbudgetsheets.surge.sh/calculators/loan-calculator/?utm_source=mataroa
- Debt Payoff Planner, up to 8 debts (Payhip): https://payhip.com/b/PtBLU?utm_source=mataroa
- 42 free budget templates, pay what you want ($0 is fine): https://smartbudgetsheet.gumroad.com/l/ngpkrb?utm_source=mataroa
General information, not financial advice. Figures are rounded examples.