Two phases, two very different payments
A home equity line of credit (HELOC) works like a credit card secured by your house, and it has two phases:
- The draw period — commonly 10 years. You can borrow up to your limit, repay, and borrow again. Many HELOCs only require interest-only payments during this phase.
- The repayment period — commonly 20 years. You can no longer draw, and whatever you owe is amortized: each payment now covers principal and interest until the balance reaches zero.
The switch from one to the other is where people get surprised. The balance hasn't changed, but the payment has.
A worked example
Say you draw $50,000 at 8.5% to renovate your kitchen, with a 10-year draw period and a 20-year repayment period:
| Monthly payment | How it's calculated | |
|---|---|---|
| Draw period (years 1–10) | $354.17 | $50,000 × 8.5% ÷ 12 |
| Repayment over 20 years | $433.91 | Standard amortization over 240 months |
| Repayment over 15 years | $492.37 | Standard amortization over 180 months |
After ten years of interest-only payments, you've paid about $42,500 in interest and still owe the full $50,000. The payment then rises by about $80 a month on a 20-year repayment schedule, or by $138 if the repayment period is 15 years. Over the full 30 years, interest totals roughly $96,600 — almost twice the amount borrowed.
Variable rates make it bigger
Most HELOCs carry a variable rate, usually the prime rate plus a margin, so your rate can change throughout both phases. If rates are two points higher — 10.5% — by the time repayment starts, the 20-year repayment payment becomes $499.19, about $145 more than the original interest-only payment. Always check what your budget looks like at a rate a couple of points above today's.
The formulas
Interest-only payment = balance × annual rate ÷ 12.
Repayment payment = P × r(1 + r)n ÷ [(1 + r)n − 1], where P is the balance when repayment starts, r is the monthly rate (annual rate ÷ 12), and n is the number of monthly payments in the repayment period.
How much can you borrow?
Lenders limit your combined loan-to-value ratio (CLTV) — your first mortgage plus the HELOC, divided by your home's value — often somewhere between 80% and 90%. With a $400,000 home, a $250,000 mortgage, and an 85% CLTV limit, the most you could borrow is $400,000 × 0.85 − $250,000 = $90,000. Your credit score, income, and debt-to-income ratio determine whether you're offered the full amount.
How to avoid payment shock
- Pay principal during the draw period. Even an extra $100 a month toward principal leaves a smaller balance to amortize later.
- Only draw what you need, when you need it. You pay interest only on what you've drawn, not on the whole credit line.
- Ask about a fixed-rate option. Some lenders let you lock part of your balance at a fixed rate.
- Know your dates. Find out exactly when your draw period ends and what your repayment term will be — it's in your HELOC agreement.
Run your own numbers in the HELOC Calculator, which shows your credit limit, both payments, and the payment jump side by side. If you're comparing a HELOC with replacing your mortgage entirely, the mortgage refinance calculator covers the other side of that decision.
The 8.5% rate is an example, not a quote; HELOC rates vary by lender, credit profile, and CLTV. Example assumes the full $50,000 is drawn at the start and no principal is paid during the draw period.