On an $80,000 line at 8.5%, the required payment can go from $566.67 to $991.89 between one month and the next. The date it happens is already written in your agreement.
A home equity line has two phases. During the draw period, typically ten years, you can borrow against the line and the required payment is often interest only. During the repayment period, typically ten to twenty years after that, you can no longer draw and you must repay the balance in full.
The payment at the transition does not drift upward. It steps.
Why the step is so large
The two payments are solving different problems.
An interest-only draw payment is simply the monthly interest on the current balance:
balance x (annual rate / 12)
It covers the cost of the money and nothing else, so the balance at the end of the draw period is the same as it was at the start.
A repayment payment must clear that whole balance within the repayment term while also covering interest, so it is the standard amortisation payment:
M = P x i(1 + i)^n / ((1 + i)^n - 1)
The difference between those two formulas is the principal component, and it appears all at once.
A real example
Take a balance of $80,000 at 8.5%, with 24 months of draw remaining and a 240-month repayment period, interest only during the draw.
The draw payment:
80,000 x (0.085 / 12) = $566.67 a month
The repayment payment, amortising $80,000 over 240 months at 8.5%:
$694.26 a month
So the jump here is about $128 a month, a rise of roughly 23%.
Now change one input. Shorten the repayment period to 120 months and the payment becomes $991.89, a jump of $425 and a rise of 75%. The repayment term is what decides the severity, and it is set in your agreement rather than by you.
Our HELOC calculator reports both payments, the difference between them, and the full repayment schedule, so the date and the size of the step are both visible before they arrive.
One detail worth noticing in that schedule: the interest in the first repayment month is $566.67, exactly the old interest-only payment. That is not a coincidence. The balance has not changed, so the interest has not changed. What changed is that you are now also paying principal.
What the rules cover
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 and the circumstances in which the lender may change them. 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 people who have not read them.
The simplification this site makes
Our calculator holds the rate constant across both phases. Most HELOCs are variable rate, tied to an index, so in practice the rate can move during the draw period and again during repayment.
We hold it constant because the alternative is predicting where rates go, and a forecast dressed up as a calculation is worse than an assumption stated plainly. The assumption is printed next to the result for the same reason.
Your own agreement will name the index and the margin, and that is where to look if you want to know how far the payment could move before the repayment period even begins.
Questions
- Why does the payment jump so much?
- Because the two phases are paying for different things. An interest-only draw payment covers the month of interest and nothing else, so the balance never falls. The repayment payment has to clear the entire balance within the repayment term as well as cover interest, so it contains a principal component that was simply absent before.
- Is every HELOC interest-only during the draw?
- No. Some require interest plus a small percentage of principal, which softens the transition because the balance is already falling. Your agreement states which applies, and the difference is large enough to be worth checking.
- Can I avoid the jump?
- Paying principal during the draw period reduces the balance that has to be amortised later, so the repayment payment is calculated on a smaller number. Whether that is the right use of the money is a question this site does not answer. Some lenders also offer refinancing of the line, on their own terms.
- Is the rate fixed?
- Usually not. Most HELOCs carry a variable rate tied to an index, so the payment can move during the draw period as well as at the transition. Our calculator holds the rate constant, which is a simplification it states, because this page does not predict where rates go.