How do you calculate a HELOC payment, and why does it jump when repayment starts?

Summary

During an interest-only draw period, the payment is the balance times the annual rate, divided by 12. When the draw period ends, principal is added and the balance is paid down over the repayment term, so the same balance at the same rate costs more each month. Most HELOCs carry a variable rate, which means the payment also moves when the rate does, even if you never draw another dollar.

Three payments on one $80,000 balance

FourLeaf Federal Credit Union publishes enough of its HELOC terms to run the numbers. Its line has a 10-year draw period with interest-only payments, followed by a 20-year repayment period of principal and interest. The standard rate is "as low as 7.00% Variable APR," pegged to the prime rate with no margin added at that tier, and the Federal Reserve's H.15 release showed the bank prime rate at 7.00% when this was written.

Borrowers who meet the conditions for the introductory offer (a VantageScore 4.0 of at least 720, an initial draw of at least $25,000, a line of no more than $500,000) start at a fixed 5.99% for 12 months.

Draw $80,000 and the payment goes through three stages. In the first year it is $399.33, interest only at 5.99%. From month 13 through year 10 it is $466.67, interest only at 7.00%, assuming prime doesn't move. In year 11 the repayment period begins, and the same $80,000 at the same 7.00%, now spread over 240 months, costs $620.24.

Between the second and third numbers, the debt and the rate stay exactly where they were. The only change is that principal is now being repaid.

The 7.00% tier also assumes things not every borrower will have: a combined loan-to-value of 65% or less, and two 0.25% discounts, one for automatic payments from a FourLeaf account and one for keeping a draw of $25,000 or more for 12 months.

The arithmetic for each period

Interest only: balance × annual rate ÷ 12. At 7.00%, $80,000 × 0.07 ÷ 12 = $466.67.

Repayment: the standard amortization formula, payment = B × r ÷ (1 − (1 + r)^−n), where B is the balance, r the monthly rate (annual rate ÷ 12), and n the number of months. For $80,000 at 7.00% over 240 months, that gives $620.24.

Not every plan is interest-only during the draw. Some set a minimum that includes part of the principal, but the CFPB's HELOC booklet notes that this principal portion "typically does not repay the principal by the end of the term." Either way, some balance is usually left when repayment starts.

What a rate change does

Per $10,000 of balance, 7% works out to $58.33 a month interest-only and $77.53 on a 20-year repayment schedule. At 8% those become $66.67 and $83.64. At 18%, which is FourLeaf's stated ceiling (the legal maximum for federal credit unions), they are $150.00 and $154.33.

That last pair shows something the low-rate rows hide. When rates are high, almost the whole payment is interest, so the step up at repayment is only a few dollars. At low rates the principal share is larger and the jump looks steeper.

The CFPB booklet says a variable-rate plan's "monthly payments may change even if you don't draw more money." Its Ask CFPB page adds that payments "are often significantly higher once you enter repayment," and that in some cases "you may have to pay back the whole amount you borrowed as soon as the repayment period begins." That lump sum is the balloon payment, and the booklet is direct about the stakes: "If you are unable to pay the balloon payment in full, you could lose your home."

The repayment term varies too. The booklet gives "ten or 15 years" as common lengths, while the Ask CFPB page says "ten or 20 years." On 15 years, $10,000 at 7% is $89.88 a month.

Where your own numbers are printed

Regulation Z requires a HELOC lender to hand over specific disclosures before the plan is opened. They include the length of the draw and repayment periods, how the minimum payment is set, and a statement if minimum payments may not repay the principal and a balloon payment may result.

The payment example in those disclosures is built on the same unit used above: "a $10,000 outstanding balance." It shows the minimum payment at a recent APR, any balloon payment, and how long repaying the $10,000 would take on minimums alone. A separate figure gives the minimum payment for $10,000 at the plan's maximum APR, along with the earliest date that maximum could apply. There is also a historical example showing how rates and payments would have moved over the most recent 15 years of index values.

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.