Two Phases, Two Very Different Payments
A HELOC is a revolving credit line secured by your home. It runs in two stages, and the transition between them is where the difficulty lies:
- Draw period — usually 10 years. You borrow what you need up to the limit, and the minimum payment is interest only. Nothing is repaid unless you choose to.
- Repayment period — usually 10 to 20 years. No further borrowing. The balance must now be amortised, so the payment includes principal.
On $60,000 at 8.75%, the interest-only payment is $438 a month. When repayment begins over 20 years, it becomes $530 — and over 10 years, $754. That jump is called payment shock, and it arrives on a fixed date known from the first day.
The Variable Rate
Most HELOCs are priced at the prime rate plus a margin, and the rate moves whenever prime does. Between 2021 and 2023 prime rose from 3.25% to 8.5% — more than doubling the interest cost on existing balances with no action by the borrower. A fixed-rate home equity loan carries no such exposure.
Some lenders allow converting part of the balance to a fixed rate. It is worth asking about before drawing, not after rates rise.
How Much You Can Draw
The limit is set by the combined loan-to-value cap, typically 80–85% of the home's appraised value minus the first mortgage. Lenders can also reduce or freeze an existing line if property values fall or your credit deteriorates — something many borrowers discovered in 2008. A HELOC is a standby facility, not a guaranteed reserve.
Costs to Check Before Signing
- Annual fee — $50–$100 whether or not you draw.
- Inactivity fee on some lines.
- Early closure fee — commonly a clawback of waived closing costs if you close within three years.
- Minimum draw at opening, which forces you to borrow to establish the line.
Sensible Uses
Staged home renovations where the total is uncertain, a bridge between buying and selling a home, or a standing emergency facility for a household with irregular income. Unsuitable for ordinary spending, and risky for anything that cannot be repaid within the draw period — because when that period ends, the payment rises whether or not you are ready.
Frequently Asked Questions
Should I pay principal during the draw period?
If you can, yes. It reduces the balance that will be amortised later and softens the payment jump considerably.
Can the lender cancel my HELOC?
They can freeze or reduce it if the home's value falls materially, if your credit worsens significantly, or if the loan is in default. Existing drawn balances remain, but further borrowing stops.
Is a HELOC better than a cash-out refinance?
Usually yes when your first mortgage carries a low rate, because a cash-out refinance replaces that rate on the entire balance. A HELOC leaves the first mortgage untouched.