How an interest-only HELOC payment is figured
On an interest-only HELOC the minimum payment covers only the month's interest, so the balance you owe stays where it is. The CFPB's booklet puts it plainly: under such a plan you pay nothing toward the principal, and if you borrow $10,000 you will owe that amount when the payment plan ends.[1] Its example: $10,000 at 10% costs $83 a month, rising to $125 if the rate climbs to 15%.[1]
Interest-only payment = balance × annual rate ÷ 12$75,000 × 8.00% ÷ 12 = $500.00
Bank examiners describe this as the normal shape of a HELOC: payments during the draw period are typically interest-only, with principal paid at the borrower's option.[3] Because the rate is variable, the payment moves every time the index does. With prime at 7.00%[6]:
| Balance | 7.00% | 8.00% | 9.00% | 10.00% |
|---|---|---|---|---|
| $25,000 | $145.83 | $166.67 | $187.50 | $208.33 |
| $50,000 | $291.67 | $333.33 | $375.00 | $416.67 |
| $75,000 | $437.50 | $500.00 | $562.50 | $625.00 |
| $100,000 | $583.33 | $666.67 | $750.00 | $833.33 |
| $150,000 | $875.00 | $1,000.00 | $1,125.00 | $1,250.00 |
What interest-only costs over the life of the line
Interest-only years cost more in total because the full balance keeps earning interest for longer. On the default example, paying interest only for 10 years and then amortizing over 20 costs $135,559 in interest. Amortizing the same $75,000 over all 30 years from the start would cost $123,116, a difference of $12,443. By the end of year 10 the amortizing borrower would owe $65,794; the interest-only borrower still owes $75,000.
| Approach | Years 1–10 | Years 11–30 | Total interest |
|---|---|---|---|
| Interest only, then 20-year repayment | $500.00 | $627.33 | $135,559 |
| Principal and interest from day one | $550.32 | $550.32 | $123,116 |
Supervisors name "interest-only features that require no amortization of principal for a protracted period" among the risk factors in home equity lending, and expect lenders to check that a borrower can repay the fully drawn line.[5]
The payment jump when interest-only ends
When the draw period ends, the balance is either due at once as a balloon or repaid over the remaining term through higher monthly payments; regulators call the result payment shock.[4] In this example the payment goes from $500.00 to $627.33, an increase of $127.33 a month, even if the rate does not move. The CFPB's brochure adds that some plans require the entire balance at the end of the draw, a balloon you could lose your home over if you cannot pay or refinance it.[2]
Two shocks can arrive togetherThe end of the draw and a higher prime rate can hit in the same year. Test both: raise the rate in the calculator by 2 or 3 points and look at the payment after the interest-only period. If a fixed payment matters more, compare a home equity loan vs. a HELOC.
Worked example
- Rate: prime 7.00% + a 1-point margin = 8.00%.
- Interest-only payment: $75,000 × 0.006667 = $500.00 a month for 120 months, $60,000 of interest, no principal.
- Repayment: $75,000 over 240 months at 8.00% = $627.33 a month.
- If the rate is 2 points higher by then, the repayment payment is $723.77.
Paying principal on an interest-only HELOC
You can usually pay more than the minimum, and many borrowers pay principal down regularly, but some lenders charge fees or penalties for paying more, so check your agreement.[1] Every dollar of principal you repay during the draw lowers both the interest and the payment you face later. The HELOC payoff calculator shows what a fixed extra amount each month does, and the HELOC payment calculator compares interest-only with principal-and-interest draw payments. For a mortgage with an interest-only period, use the interest-only mortgage calculator.
Frequently asked questions
How do you calculate an interest-only HELOC payment?
Multiply the balance by the annual rate and divide by 12. $50,000 at 8.00% is $333.33 a month.
How long does the interest-only period on a HELOC last?
Usually as long as the draw period, which is typically five or 10 years according to the OCC's examiner handbook.[3] Your agreement states the exact length.
What happens when a HELOC interest-only period ends?
You can no longer draw, and the balance is either repaid over the remaining term with principal and interest or, on some plans, due at once as a balloon payment.[4]
Is an interest-only HELOC a good idea?
It keeps payments low while you draw, which suits short-term needs you can repay quickly. It costs more in total and leaves the full balance to repay later, so it works best with a clear plan to pay principal.
Sources
- What you should know about home equity lines of credit (booklet)
- What You Should Know About Home Equity Lines of Credit (HELOC)
- Comptroller's Handbook: Residential Real Estate Lending (home equity lines and loans)
- Risk Management of Home Equity Lines of Credit Approaching the End-of-Draw Periods (OCC Bulletin 2014-29)
- Credit Risk Management Guidance for Home Equity Lending (interagency guidance, SR 05-11)
- H.15 Selected Interest Rates (bank prime loan rate)