Overview

During a HELOC draw period you can borrow up to your credit limit and—on many plans—make interest-only payments. Lenders commonly use a variable rate tied to an index (often the prime rate) plus a margin, so monthly interest can change as market rates move (Consumer Financial Protection Bureau: https://consumerfinance.gov).

Why rising rates matter

  • Variable-rate mechanics: Most HELOCs calculate rate = index (e.g., prime) + margin. When the index rises, so does your rate and interest charge. The Federal Reserve’s policy moves influence the prime rate and bank pricing (Board of Governors of the Federal Reserve System: https://www.federalreserve.gov).
  • Payment shock at repayment: Many HELOCs shift from a draw period to a repayment period (amortizing principal + interest). If rates climbed during the draw, borrowers face higher interest plus newly required principal payments — sometimes doubling or tripling monthly payments compared with interest-only amounts.

Real-world illustration

  • Example: During a 10-year draw you pay interest-only on a $75,000 balance. At 4% that’s about $250/month in interest. If the rate rises to 7%, interest jumps to about $438/month. When the draw ends and you must amortize principal over, say, 15 years, total monthly payments rise further as principal is added.

Who is most at risk

  • Borrowers with variable-rate HELOCs who maximized draws.
  • Homeowners who relied on interest-only payments during the draw and did not reduce principal.
  • Those with tight budgets or declining home equity if home prices fall.

Common warning signs

  • A rising index (prime) or frequent rate adjustments stated in your HELOC agreement.
  • Increasing minimum payments or notices from your lender about changing payment structure.
  • Rapidly drawing toward your credit limit while rates climb.

Practical strategies to reduce risk

  • Budget for higher payments: Run a worst-case-rate scenario (add 200–300 basis points to today’s rate) when planning draws.
  • Make voluntary principal payments during the draw period to lower future amortization.
  • Convert to a fixed-rate option: Many lenders offer fixed-rate conversions or fixed-rate second mortgages. See HELOC reset and conversion strategies to compare options (HELOC Reset Strategies: When to Convert to a Fixed-Rate Loan: https://finhelp.io/glossary/heloc-reset-strategies-when-to-convert-to-a-fixed-rate-loan/).
  • Consider alternatives: For long-term projects, a fixed-rate home equity loan or a cash-out refinance can lock cost (compare HELOC vs Cash-Out Refinance: https://finhelp.io/glossary/heloc-vs-cash-out-refinance-pros-cons-and-costs/).
  • Refinance if necessary: When rates and equity allow, refinancing into a fixed-rate product can stop future rate risk.

In-practice tip

In my experience advising homeowners, the most resilient borrowers plan as if their HELOC rate will increase and make at least some principal payments during the draw. That habit reduces payment shock and preserves options at the end of the draw period.

Quick action checklist

  • Review your HELOC contract for rate index, margin, and payment change timing.
  • Run payment projections with higher rates and with amortization.
  • Ask your lender about fixed-rate conversion options and any conversion fees.
  • Prioritize building an emergency fund to cover potential payment increases.

Frequently asked questions

  • What happens after the draw period ends?
    Typically your account enters a repayment phase where both principal and interest are required; timing and amortization length vary by contract (Consumer Financial Protection Bureau: https://consumerfinance.gov).

  • Can I refinance or convert my HELOC if rates rise?
    Yes. Options include lender conversion to a fixed rate, refinancing to a fixed-rate home equity loan, or a cash-out refinance. Compare costs, terms, and closing fees before deciding.

  • Should I avoid HELOCs entirely in a rising-rate environment?
    Not necessarily. HELOCs remain useful for short-term liquidity and staged projects, but you should limit outstanding balances, pay down principal when possible, and have a plan for conversion or refinance.

Authoritative sources

Professional disclaimer

This article is educational and not individualized financial advice. For decisions about your HELOC, speak with a qualified mortgage professional or financial advisor who can review your contract, income, credit profile, and local market conditions.