A HELOC (home equity line of credit) doesn't behave like a typical loan with one consistent payment for the life of the balance. It has two distinct phases with very different payment structures, and the jump between them catches many borrowers off guard if they haven't run the numbers ahead of time.
During the draw period (often the first 10 years), many HELOCs only require interest-only payments — you're paying the interest accruing on whatever balance you've drawn, but not reducing the principal at all unless you choose to. Once the draw period ends and repayment begins, the outstanding balance converts to a fully-amortizing payment (like a standard loan), calculated to pay off the entire remaining balance, with interest, over the repayment term.
How Both Payment Types Are Calculated
Interest-only payment = Balance × Annual Rate ÷ 12. This is simple and doesn't change unless the balance or rate changes.
Fully-amortizing payment uses the standard loan formula: M = P × [r(1+r)^n] / [(1+r)^n − 1], where P is the balance at the start of repayment, r is the monthly rate, and n is the number of repayment months.
A Worked Example
On a $40,000 HELOC balance at 9% interest, the interest-only payment during the draw period is $40,000 × 0.09 ÷ 12 = $300/month — and the balance never decreases unless you pay more. Once the draw period ends and a 15-year repayment term begins on that same $40,000 balance, the fully-amortizing payment jumps to about $406/month — a 35% increase, purely from the shift to also paying down principal.
Common Mistakes to Avoid
- Budgeting only for the interest-only payment long-term: that payment is temporary — plan ahead for the higher fully-amortizing payment once repayment begins.
- Not paying down principal voluntarily during the draw period: even modest extra payments during the interest-only phase reduce the balance the repayment-phase payment will be calculated on.
- Treating a HELOC balance as free access to cash: it's a variable-rate loan secured by your home — a rising rate environment can increase your payment meaningfully even during the interest-only phase.
- Forgetting the draw period has an end date: many borrowers are surprised when the repayment phase begins — mark the transition date and prepare for it well in advance.
Bottom Line
A HELOC's real cost depends heavily on which phase you're in. Use a HELOC Calculator to compare your interest-only draw-period payment against your future fully-amortizing repayment-period payment on the same balance.