Two different products, two different payment shapes
A home equity line of credit is a revolving credit line secured by home equity. During the draw period, the borrower can withdraw funds and typically pays interest only on the amount drawn, so the balance does not decline from the minimum payment. When the repayment period begins, no further draws are allowed and the lender recalculates the payment needed to fully pay off that same balance over the repayment term — producing a materially higher monthly payment than the draw-period minimum.
A home equity loan, by contrast, is a second-lien installment loan: a fixed lump sum borrowed against home equity and repaid in equal monthly installments at a fixed rate over a set term from day one, the same amortization structure as a standard mortgage. There is no draw period and no payment jump — the payment is the same in month 1 as in the final month.
Worked example: HELOC draw-to-repayment jump
A $50,000 balance at 8.5% with a 10-year draw period and a 15-year repayment period has an interest-only payment of $354.17 per month during the draw period. Once repayment begins, the amortizing payment on the same $50,000 balance over 15 years is $492.37 — a payment increase of $138.20. Total interest across both phases (10 years of interest-only payments plus 15 years of amortizing payments) is $81,126.56.
| Phase | Payment covers | Balance | Typical duration |
|---|---|---|---|
| Draw period | Interest only (in this model) | Stays at the drawn amount | Often 5–10 years |
| Repayment period | Interest + principal (fully amortizing) | Declines to zero | Often 10–20 years |
Worked example: home equity loan borrowing power and payment
Home equity loan lenders typically cap borrowing at a maximum combined loan-to-value (CLTV) ratio — commonly around 80% to 85%. A $400,000 home with a $250,000 mortgage balance at an 80% CLTV limit leaves $70,000 available to borrow ($400,000 × 0.80 − $250,000). Borrowing $50,000 at 8% over 15 years costs $477.83 per month — one fixed payment for the entire term — about $36,009 in total interest, and produces a 75% combined LTV.
- Available equity = Home value × (CLTV limit ÷ 100) − mortgage balance
- Monthly payment = P × [r(1+r)^n] ÷ [(1+r)^n − 1], where P = loan amount, n = months
- Combined LTV = (mortgage balance + loan amount) ÷ home value × 100
Which structure fits which need
A HELOC's revolving, interest-only draw period suits situations with uncertain or staged funding needs — a renovation with phased costs, for example — where a borrower does not want to pay interest on funds not yet used. A home equity loan's fixed lump sum and level payment from day one suits a single known expense, since the payment (and total interest) is fixed and predictable with no repayment-period jump to plan around. Both are second-lien products secured by the home, so both carry foreclosure risk if payments are missed — this is the shared risk regardless of which structure is chosen.
الأسئلة الشائعة
What is the difference between a HELOC and a home equity loan?
A HELOC is a revolving credit line with an interest-only draw period followed by a fully amortizing repayment period. A home equity loan is a fixed lump sum repaid in equal installments at a fixed rate over a set term from the start, with no draw period and no payment jump.
Why does a HELOC payment jump so much when repayment starts?
Because interest-only draw-period payments don't reduce principal, the full drawn balance is still outstanding when repayment begins, but it must now be repaid over a fixed, often shorter term. On a $50,000 balance at 8.5%, the payment rises from $354.17 (interest only) to $492.37 (amortizing) — a $138.20 jump.
How much can I borrow with a home equity loan?
Lenders typically cap the combined loan-to-value ratio at around 80% to 85%. A $400,000 home with a $250,000 mortgage at an 80% CLTV limit leaves $70,000 of borrowable equity, though actual approval also depends on credit, income and an appraisal.
Are HELOC rates fixed or variable?
Most HELOCs carry a variable interest rate, commonly tied to an index such as the prime rate, so the payment can change during both the draw and repayment periods. Home equity loans are typically fixed-rate for the full term.
المراجع
- Consumer Financial Protection Bureau (CFPB) — What you should know about home equity lines of credit. https://www.consumerfinance.gov/
- Consumer Financial Protection Bureau (CFPB) — What is a home equity loan? https://www.consumerfinance.gov/
- Federal Trade Commission (FTC) — Home Equity Loans and Home Equity Lines of Credit. https://consumer.ftc.gov/