When Does Payment Shock Happen?

It depends on your HELOC's terms:

Common HELOC Structures

• 10-year draw / 20-year repayment (most common)
  • Interest-only for first 10 years
  • Principal + interest for next 20 years
  • Total loan term: 30 years
• 5-year draw / 25-year repayment
  • Shorter draw period = earlier payment shock
  • Longer repayment period = lower new payment
• 15-year draw / 15-year repayment
  • Longer draw period = more time to prepare
  • Shorter repayment period = higher new payment

Check your HELOC documents to find your exact draw period end date. It's usually listed on your monthly statement as "Draw Period Ends: MM/YYYY".

How to Calculate Your New Payment

Use our HELOC Calculator to model your specific situation, or follow this formula:

Step-by-Step Calculation

1. Find your current balance: Check your latest HELOC statement
2. Check your current rate: Variable rates change monthly/quarterly
3. Count remaining years: How many years left in repayment period?
4. Use the amortization formula or calculator

Example Calculation

Current balance: $80,000
Current rate: 9.0% APR
Repayment period: 20 years
Monthly rate: 9.0% ÷ 12 = 0.75%
Number of payments: 20 × 12 = 240
New monthly payment: $720

Previous interest-only payment: $600/month
Payment increase: $120/month (20% increase)

5 Strategies to Prepare for Payment Shock

1. Start Paying Principal Now (Before Repayment Period)

The best way to reduce future payment shock is to pay down principal during the draw period.

• Example: You have a $75k balance with 2 years left in draw period
• Strategy: Pay an extra $625/month ($7,500/year) to reduce balance to $60k
• Result: Your repayment payment drops from $650 to $520, a $130/month savings

2. Refinance to a Fixed-Rate Home Equity Loan

Convert your variable-rate HELOC to a fixed-rate home equity loan before the repayment period starts.

Pros:

• ✅ Lock in a fixed rate (protect against future increases)
• ✅ Extend the term (e.g., 15 or 20 years) for lower monthly payment
• ✅ Predictable payment for budgeting

Cons:

• ❌ Closing costs (2-5% of loan amount)
• ❌ May have higher rate than current HELOC (but fixed)
• ❌ Lose flexibility to reborrow

3. Refinance Your First Mortgage (Cash-Out Refi)

If your first mortgage rate is high or you have significant equity, a cash-out refinance can pay off your HELOC and consolidate everything into one lower payment.

Example:

• First mortgage: $250k at 6.5% = $1,580/month
• HELOC: $75k at 9.0% = $531/month (interest-only ending soon)
• Total current payment: $2,111/month

Cash-out refinance: $325k at 6.75% for 30 years = $2,108/month

• ✅ Slightly lower payment now
• ✅ Avoid HELOC payment shock later
• ✅ Fixed rate for 30 years

When this works best: When first mortgage rates are competitive and you can get a rate lower than your HELOC.

4. Negotiate a Modified Repayment Plan with Your Lender

Some lenders will work with you to extend the repayment period or offer a temporary payment reduction if you're facing financial hardship.

• Extend repayment period: From 20 to 25 years to lower payment
• Convert to interest-only for 1-2 more years: Buys you time to improve finances
• Fixed-rate conversion option: Some HELOCs allow you to fix the rate on all or part of balance

Important: Contact your lender before you miss payments. They're more willing to work with you proactively than reactively.

5. Sell the Property or Tap Other Assets

If you can't afford the new payment and can't refinance, you may need to consider:

• Selling the home: Pay off both mortgages and downsize
• Renting out part of the home: ADU, basement apartment, or extra bedroom to cover increased payment
• Using investments/savings: Pay down or pay off HELOC balance

Warning Signs You're Heading for Trouble

Watch for these red flags 1-2 years before your draw period ends:

• ❌ You're only making minimum payments: Not paying down any principal
• ❌ Your HELOC balance is maxed out: Using full credit limit
• ❌ Variable rates have increased 2%+: Your payment already went up during draw period
• ❌ Debt-to-income ratio over 43%: Won't qualify for refinancing
• ❌ Home value has dropped: Underwater or low equity prevents refinancing
• ❌ Income has decreased: Job loss, retirement, divorce

If you see 2+ of these signs, act NOW: Contact your lender, explore refinancing, or start aggressively paying down principal.

Timeline: When to Act

2 Years Before Draw Period Ends

• ✅ Check your credit score (need 680+ to refinance)
• ✅ Review your budget and calculate future payment
• ✅ Start paying extra toward principal if possible
• ✅ Research refinancing options (home equity loan, cash-out refi)

1 Year Before Draw Period Ends

• ✅ Get pre-qualified for refinancing
• ✅ Compare rates from 3-5 lenders
• ✅ Consider fixed-rate HELOC conversion (if offered)
• ✅ Increase principal payments to reduce balance

6 Months Before Draw Period Ends

• ✅ Lock in refinancing if you're going that route
• ✅ Adjust budget for new payment amount
• ✅ Build emergency fund for payment cushion
• ✅ Contact lender if you foresee payment problems

3 Months Before Draw Period Ends

• ✅ Confirm new payment amount with lender
• ✅ Set up auto-pay for new payment amount
• ✅ Final check: Is refinancing or loan modification still an option?

What Happens If You Can't Afford the New Payment?

If you miss HELOC payments after the draw period ends, here's the typical sequence:

1. 30 days late: Late fee, reported to credit bureaus, credit score drops 50-100 points
2. 60 days late: More late fees, lender may freeze your HELOC (no more draws), credit score drops further
3. 90 days late: Account sent to collections, lender may accelerate the loan (demand full payment), foreclosure process may begin
4. 120+ days late: Foreclosure proceedings, your home is at serious risk

Case Study: How One Homeowner Avoided Payment Shock

The Situation

• Name: Jennifer (Chicago homeowner)
• HELOC opened: 2015 for $100k at 4.25% variable
• Draw period: 10 years (ending January 2025)
• Current balance: $95,000
• Current rate: 8.75% (rates increased)
• Current payment: $692/month (interest-only)
• New payment starting Feb 2025: $883/month (principal + interest)
• Payment increase: $191/month (28% increase)

Jennifer's Strategy (Started 18 Months Early)

1. Paid down $20k principal by cutting expenses and using bonus money (reduced balance to $75k)
2. Shopped 5 lenders for cash-out refinance
3. Refinanced first mortgage from $280k at 6.5% to $355k at 6.25% for 30 years
   • Paid off $75k HELOC balance
   • New total payment: $2,185/month
   • Old total payment: $1,770 (first) + $692 (HELOC) = $2,462
   • Savings: $277/month

The Result

Jennifer saved $277/month and locked in a fixed rate, eliminating future rate risk. By acting early, she avoided payment shock entirely.

Calculate Your Payment Shock Now

Don't wait until the last minute. Use our HELOC Calculator to:

• See exactly what your new payment will be
• Model different scenarios (paying down principal, refinancing, etc.)
• Understand total interest costs over the full loan term
• Compare HELOC vs fixed home equity loan options

Knowledge is power. The sooner you understand your future payment, the more options you have to prepare.

Bottom Line

HELOC payment shock is predictable and preventable. You have years of advance notice, so use that time wisely:

1. Calculate your new payment 1-2 years early
2. Pay down principal during draw period if possible
3. Explore refinancing options (home equity loan or cash-out refi)
4. Adjust your budget to accommodate the new payment
5. Contact your lender proactively if you foresee problems

The worst thing you can do is ignore it until it happens. Your HELOC statement shows the draw period end date, so circle it on your calendar and start preparing today.