A home equity line usually asks for interest only during its draw period. The required payment is low, which is the appeal, and what it leaves behind is the part worth understanding before ten years of it go by.
The payment that changes nothing
An interest-only payment is defined as the interest accrued that month:
balance x (annual rate / 12)
On $80,000 at 8.5%:
80,000 x (0.085 / 12) = $566.67
Pay exactly that and the month closes where it opened. Interest was charged, interest was paid, and the balance is $80,000 again.
Repeat for ten years and you have paid:
566.67 x 120 = $68,000
Sixty-eight thousand dollars, and you owe exactly what you owed on the first day. Not nearly as much. Exactly as much.
Why the step happens
The two payments are solving different problems.
The draw payment covers the cost of the money. The repayment payment covers the cost of the money and clears the debt within the repayment term, so it contains a principal component that was simply absent before.
That component appears all at once, on a date already written in your agreement.
One detail from the schedule makes the mechanism plain: the interest in the first repayment month is $566.67, exactly the old interest-only payment. The balance has not changed, so the interest has not changed. What changed is that you are now also paying principal.
The variable that actually moves the outcome
The repayment payment is calculated on the balance when the draw period ends. Reduce that balance and you reduce the payment, by arithmetic rather than by negotiation.
Paying $100 a month above the interest for the last two years of the draw removes $2,400 of principal plus the interest that principal would have generated. The repayment payment is then computed on a smaller figure, and every month of the twenty-year repayment is cheaper.
Our HELOC calculator computes both payments and the full repayment schedule, so you can see the step before it arrives and test what paying above the interest does to it.
What the rules require
Home equity plans have their own section of Regulation Z, 12 CFR 1026.40, which sets out what must be disclosed when the plan is opened, including the payment terms for both phases. The parent regulation is 12 CFR 1026.
So the transition date and the repayment formula are in documents you already have. The disclosure requirement exists precisely because the step is large enough to surprise someone who has not read them.
The assumption this makes
Our figures hold the rate constant across both phases. Most lines are variable rate, tied to an index, so in practice the rate can move during the draw and again during repayment.
We hold it fixed because the alternative is predicting where rates go, and a forecast presented as a calculation is worse than an assumption stated plainly. The assumption is printed next to the result for the same reason.
Questions
- If I pay interest only for ten years, how much do I still owe?
- All of it. An interest-only payment covers exactly the interest accrued that month and nothing else, so the closing balance equals the opening balance. After one month or after ten years the debt is the same figure you started with.
- Is an interest-only period a bad product?
- This site does not rank it. A low required payment can be the right fit when income is irregular or a line is drawn briefly and repaid. What makes it go wrong is treating the required payment as the intended one, because the required payment is designed to leave the balance untouched.
- What happens when the interest-only period ends?
- The payment steps up to one that clears the whole balance over the remaining term. On an 80,000 dollar line at 8.5 percent with twenty years of repayment left, the required payment moves from about 567 dollars to about 694 dollars, on the same balance at the same rate.
- Can I pay principal during the draw period?
- Usually yes, and it is the thing that changes the outcome. Anything above the interest reduces the balance, which reduces every future month of interest and shrinks the payment the repayment period will demand.