HELOCs: Your Equity Is Not What You Can Borrow
Two things catch people out with a home equity line, and both are avoidable. Your equity is not what you can borrow - a lender caps total debt at a share of the home's value, so $200,000 of equity can mean $125,000 available, or in some cases nothing at all. And the cheap interest-only payment jumps when the draw period ends.
Surprise one: the equity you cannot reach
Equity is what your home is worth minus what you owe on it. Simple enough.
What you can borrow is a different sum, and it is the one that matters.
Lenders cap your total borrowing against the home at a share of its value - commonly around 85%. Your existing mortgage counts towards that cap.
| Amount | |
|---|---|
| Home value | $500,000 |
| Mortgage balance | $300,000 |
| Your equity | $200,000 |
| 85% cap on total borrowing | $425,000 |
| Actually available | $125,000 |
$200,000 of equity. $125,000 you can borrow. Not a trick - just two different sums that people assume are the same.
The case that shocks people
Now a $400,000 home with a $350,000 mortgage.
Equity: $50,000. Available to borrow: nothing.
The 85% cap is $340,000, which is already below the $350,000 mortgage. There is no room at all.
Someone in this position, looking at $50,000 of equity on paper, can be genuinely blindsided. The HELOC calculator leads with this figure for exactly that reason.
Surprise two: the payment jump
A home equity line has two lives, and only the first one gets advertised.
The draw period - often ten years. You can borrow freely, and you can usually pay interest only. Cheap and flexible.
The repayment period - what follows. Now you have to clear the balance as well, and the payment rises.
On $100,000 borrowed at 8%, with a ten-year draw and twenty years to repay:
| Draw period | Repayment period | |
|---|---|---|
| Monthly payment | $667 | $836 |
| Interest paid | $80,000 | $100,746 |
| Balance at the end | $100,000 | $0 |
Two things stand out.
The jump here is modest - $667 to $836 - because twenty years is a long time to repay over. Shorten that repayment period to ten years and the payment becomes $1,213, nearly double. The length of the repayment period decides how brutal the jump is, and it varies by lender.
Ten years of interest-only payments cost $80,000 and the balance never moves. At the end of the draw period you still owe the full $100,000. That is what interest-only means, and it is worth seeing as a number rather than a concept.
Over the whole life, $100,000 borrowed costs $280,746 to repay.
The test worth applying
If you cannot comfortably afford the repayment figure today, you cannot afford the HELOC.
Not the interest-only figure - the one that comes later. Because it is coming whether or not your circumstances have improved, and plenty of people arrive at that date with less income than when they signed.
Work out the repayment payment first. If it looks uncomfortable, the cheap early years are not a reason to proceed.
The thing that makes it different
This is not a credit card with a better rate.
Fall behind on a credit card and your credit suffers. Fall behind on this and you can lose the house, because the house is the security. That is exactly why the rate is lower, and it is the reason to be more careful rather than less.
It also means the sensible uses are narrower than the marketing suggests. Something that adds lasting value or genuinely saves money - a repair that prevents worse damage, or clearing debt at a much higher rate - has a real case. Spending that leaves nothing behind does not, because the debt outlasts the thing you bought and your home is on the line.
Other things to check
The rate is usually variable. Both payments can rise, including during the interest-only period. Try the calculator with a rate two points higher - over thirty years that is not a remote possibility.
Your combined loan-to-value. Borrowing the full $125,000 available takes you to 85% of the home’s value. If prices fall, you could owe more than it is worth, which makes selling or remortgaging very difficult.
Whether a fixed home equity loan suits you better. If you know the amount you need, a fixed loan gives certainty on both the rate and the payment. A line of credit is for when you genuinely need the flexibility to draw over time.
Before signing
- Find out what is actually available, not what your equity is.
- Work out the repayment payment, and judge affordability on that.
- Ask how long the repayment period is - it decides the size of the jump.
- Try a higher rate and see whether it still works.
- Be honest about what it is for. The house is the security.
Run your own figures in the HELOC calculator - it leads with what is genuinely available and what the payment becomes when the cheap years end.
Common questions about heloc
Why can I not borrow all my equity?
Lenders cap total borrowing at a share of the home's value, commonly around 85%, and your existing mortgage counts towards that cap. On a $500,000 home the cap is $425,000; with a $300,000 mortgage that leaves $125,000 available even though your equity is $200,000.
Can I have equity and still be able to borrow nothing?
Yes, and it is the case people are most surprised by. A $400,000 home with a $350,000 mortgage has $50,000 of equity. But 85% of $400,000 is $340,000 - already below the mortgage. Nothing at all is available.
What is the draw period and why does the payment jump?
For the first several years you can borrow freely and often pay interest only. Then it flips into repayment and you have to clear the balance too. On $100,000 at 8% the payment goes from $667 to $836 - and with a shorter repayment period the jump is far larger.
How much interest do I pay before touching the balance?
On $100,000 at 8% over a ten-year draw period, $80,000 of interest - and the balance is still $100,000 at the end of it. That is the real cost of an interest-only period, and it is rarely presented that way.
Is a HELOC the same as a credit card?
No, and the difference matters more than anything else here. Falling behind on a credit card damages your credit. Falling behind on this can cost you your home, because the house is the security. That is why the rate is lower, and why it deserves more caution.