What changes when a HELOC's draw period ends?

Summary

You can no longer borrow, and whatever you owe has to be paid down, so the monthly payment usually goes up. At FourLeaf Federal Credit Union, ten years of interest-only payments give way to 20 years of principal and interest, which on $50,000 at 7.00% takes the payment from $291.67 to $387.65. Some plans go further and ask for the whole balance at once when the draw period closes.

Before the switch

A HELOC is an open-end line of credit "that allows you to borrow repeatedly against your home equity," as the CFPB puts it. During the draw period you can spend up to the limit, repay and spend again. The CFPB gives ten years as an example of how long that period might last, and both lenders below use ten.

What you pay in those years varies more than the rate does. FourLeaf asks only for the interest for the first ten years, which means the principal does not move. Third Federal Savings & Loan has a 10-year draw inside a 30-year total repayment period, and its sample payment on a $50,000 balance at 6.49% is $315.71, the amount that clears the balance over 30 years. Its minimum monthly payment is $100.

After the switch

Once the draw period ends, the CFPB says, "Monthly payments are often significantly higher once you enter repayment," and in some cases the full amount is due as soon as repayment begins. That lump sum is a balloon payment, and the CFPB's booklet warns that if you cannot pay it in full, "you could lose your home."

FourLeaf's schedule shows the ordinary version of the jump. Borrow $50,000, carry it through the draw period, and the payment moves from $291.67 to $387.65, about a third more, if the rate is still 7.00%. The rate is variable, with a floor of 3.25% and a cap of 18%. At the cap, the same balance costs $750.00 a month during the draw period and $771.66 afterward, so by then the switch barely registers next to the rate.

When the lender can freeze the line

An unused line is not money in the bank. The CFPB's booklet says HELOCs "generally permit the lender to freeze or reduce your credit line if the value of your home falls or if they see a change for the worse in your financial situation."

Regulation Z limits when that can happen. Under 12 CFR 1026.40(f)(3)(vi), a lender may stop further draws or lower the limit only during a period when the home's value has declined significantly below the appraised value used for the plan, the lender reasonably believes a material change in your finances will keep you from repaying, you are in default of a material obligation, government action keeps the lender from charging the agreed APR or pushes its security interest below 120% of the line, or its regulator has told it that further advances are unsafe and unsound. Demanding the whole balance early is allowed in fewer cases, among them fraud or material misrepresentation, failure to meet the repayment terms, or something you do or fail to do that harms the lender's security.

Locking part of the balance

Some lines let you move part or all of the balance to a fixed rate. The CFPB notes the fixed rate "is usually higher than the variable rate but is also more predictable." FourLeaf offers this at no extra cost, with 5-, 10- and 20-year terms, a $10,000 minimum per lock and up to three locks open at once.

A sale ends the line as well. According to the CFPB, if you sell your home, "you are generally required to pay off your HELOC in full immediately."

Sources

Written by Kaz (pen name). Figures are copied from providers' published pages on the dates shown. We have not used these products. Corrections: contact form.