HELOC

In more detail

During the draw period, often 10 years, you borrow what you need up to the limit, repay and borrow again, and many lenders require only interest payments. In the repayment period, often 15 or 20 years, you can no longer draw and the balance is amortised, so the payment jumps. The rate is usually variable, tied to a benchmark rate plus a margin. The credit limit depends on your equity, typically capped by a combined loan-to-value ratio. Because the home is collateral, default risks foreclosure.

Why it matters

The interest-only years make a HELOC look cheap, and the payment shock at the end of the draw period, or after a rate rise, catches many borrowers out. Using it for spending rather than for things that add value turns home equity into debt.

Example

On a $50,000 balance at 8%:

If the variable rate rises to 10%, the interest-only payment becomes $416.67 and the 15-year repayment $537.30.