Your HELOC Payment Can Jump When the Draw Period Ends. Check These Terms Now

Why this matters: With long-term rates elevated, many owners are tapping equity instead of refinancing a low first mortgage. A HELOC's payment can be manageable in year one and much larger later.

Cover: a timeline with a low phase that steps up, beside an adjustable dial. Illustration created for mortgage.news; it does not depict a real person, property or document.

Two phases, two payment rules

The CFPB explains that a HELOC is an open-end line of credit against your home equity. During the borrowing period, called the draw period, you can generally spend up to your credit limit. The CFPB gives 10 years as an example draw period. Many plans set minimum monthly payments based on your current balance.

The CFPB's HELOC booklet, first prepared by the Federal Reserve Board, explains that some plans allow interest-only payments during the draw. When the draw ends, you may have to repay the balance over a set repayment period, or in some plans pay it all at once in a balloon payment. Ask which applies to yours.

Why the payment can reset even if rates do not move

Hypothetical example: on a $60,000 balance at 8.5%, an interest-only payment is about $425 a month. Repaying the same balance over 20 years at the same rate is about $521 a month. Over 10 years it is about $744. The rate did not change. The payment rule did.

And the rate can move too

Most HELOCs carry a variable rate tied to a public index plus a margin. The booklet explains that lenders must disclose the index, the margin and any caps on how high the rate can go. A higher index raises the payment in either phase.

Federal rules under Regulation Z, section 1026.40 require lenders to disclose the length of the draw and repayment periods, how the minimum payment is calculated, and how the rate can change. The CFPB notes that if disclosed terms change before the account opens, you can decline and get your fees back, according to its guidance on changed terms.

Check these terms on your account

• The exact date your draw period ends.
• Whether you will repay over a fixed term or owe a balloon.
• The index, margin, current rate and any lifetime cap.
• Whether the lender can freeze or reduce the line, which the CFPB notes can happen if your home value falls significantly.

The takeaway

Ask your lender to calculate your payment on the first day of repayment at today's rate and at the cap. If either number strains your budget, plan now by paying down principal, budgeting for the increase, or asking about refinancing options before the switch.