A Home Equity Line of Credit (HELOC) allows homeowners to borrow against the equity in their home through a revolving credit line. These loans typically feature two phases: a draw period, usually lasting 5 to 10 years, during which borrowers can withdraw funds and pay interest only, and a repayment period, lasting 10 to 20 years, when principal and interest payments are required.
The HELOC Interest-Only Period Disclosure is a mandatory document lenders must provide. It clearly outlines the duration of the interest-only draw period, how payments are calculated during and after that phase, and when the mandatory transition to principal and interest payments will occur. This disclosure also highlights how possible changes in variable interest rates can affect future payments.
This disclosure aims to prevent “payment shock,” the often-surprising increase in monthly payments that can happen once the loan moves from interest-only payments to full amortization. For example, a borrower with a $50,000 HELOC at 7% interest might pay approximately $292 monthly during the interest-only phase, but payments can jump to around $450 when principal repayment begins over a 15-year term.
To manage your HELOC effectively, carefully review the Interest-Only Period Disclosure, consider making principal payments during the draw period to reduce future amounts owed, budget ahead for higher payments, and monitor interest rate changes since most HELOCs have variable rates. Refinancing or transitioning to a fixed-rate loan may also provide payment stability as the draw period ends.
For a clear explanation of HELOC basics, visit our Home Equity Line of Credit (HELOC) glossary. To understand how to prepare for changes in payments, see our guide on payment shock.
For more information directly from the source, see the Consumer Financial Protection Bureau’s overview of HELOCs at consumerfinance.gov.
