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Home equity lines of credit (HELOCs) offer flexibility, but many homeowners are caught off guard when the interest-only period ends and they must begin repaying both principal and interest. This sudden increase in monthly payments is called “payment shock,” and it can seriously impact your finances if unprepared.
In this article, we’ll break down how to calculate payment shock, explain what happens during the conversion period, and offer tips to mitigate financial strain. If you’re nearing the end of your HELOC draw period, this guide is for you.
What Happens When a HELOC Converts?
A standard HELOC has two phases:
- Draw Period: Typically lasts 5–10 years. During this phase, borrowers can withdraw funds as needed and make interest-only payments.
- Repayment Period: Lasts 10–20 years. Borrowers can no longer draw funds and must start repaying both the interest and the principal.
The transition from draw to repayment phase can result in a steep increase in your monthly payments—this is the “payment shock.”
How to Calculate HELOC Payment Shock
To understand your new monthly payment, you’ll need the following information:
- Outstanding HELOC balance
- Interest rate (usually variable)
- Repayment term remaining (in months)
Step-by-Step Payment Calculation
1. Determine the Balance and Interest Rate
Example: $75,000 outstanding balance at a 7.5% variable interest rate.
2. Use the Amortization Formula
Monthly payment = P × [r(1 + r)^n] / [(1 + r)^n – 1]
Where:
- P = principal ($75,000)
- r = monthly interest rate (7.5% ÷ 12 = 0.625% = 0.00625)
- n = number of months (e.g., 180 for 15 years)
Calculation:
Monthly payment = 75,000 × [0.00625(1 + 0.00625)^180] / [(1 + 0.00625)^180 – 1]
Monthly payment ≈ $694.67
If you were previously paying only interest ($75,000 × 0.00625 = $468.75), your payment has increased by 48%, or $225.92—that’s the payment shock.
Factors That Influence Payment Shock
- Variable Rates: If your rate rises, so will your monthly payment.
- Remaining Term: Shorter repayment periods mean higher monthly payments.
- Balance at Conversion: Larger balances create a greater payment shock.
- Lender Policies: Some lenders offer a balloon payment or a re-amortized payment structure.
How to Prepare for HELOC Conversion
1. Evaluate Your Budget
Adjust your spending now to accommodate the future payment. Use a budgeting app or spreadsheet to model scenarios.
2. Consider Refinancing Options
Look into converting your HELOC to a fixed-rate home equity loan or refinancing your first mortgage and HELOC into a single loan.
3. Talk to Your Lender Early
Lenders may offer modification options or interest-only extensions. The earlier you start the conversation, the more flexibility you’ll have.
4. Build a Cushion
Start setting aside funds during the draw period to offset the future increase in payments.
FAQ: HELOC Payment Shock
How much will my HELOC payment increase?
This depends on your balance, interest rate, and repayment term. In many cases, payment increases can range from 40% to 200%.
Can I avoid payment shock?
Yes. Planning ahead by refinancing or gradually paying down your balance can help reduce or avoid a sharp increase in payments.
Can I extend my interest-only period?
Some lenders may offer extensions, but terms vary. It’s best to contact your lender to explore available options.
Read Next
Unlock Your Home Equity with Figure
- Approval in 5 minutes. Funding in as few as 5 days
- Borrow $20K-$400K
- Consolidate debt or finance home projects
- Fastest way to turn home equity into cash
- 100% online application
Our advice is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
