A HELOC has a $75,000 line, a 10-year draw period and a 20-year repayment period. The borrower has drawn $30,000. If the agreement permits interest-only payments during the draw period and full amortization afterward, how do payments change between the two periods?
Correct Answer
D) Payments may be interest-only for the 10 years, then amortize over 20
D. Under this agreement, interest-only draw-period payments give way to amortizing repayment. The ten-year draw period permits interest-only payments; those payments do not reduce principal. The agreement then amortizes the outstanding balance over twenty years. The $75,000 credit limit is not itself the amount owed. Scope and exceptions: The balance entering repayment may differ from today’s $30,000 if there are additional draws or principal payments. Not every HELOC has this schedule; some require a balloon. Amortization does not mean a fixed rate, and rates can affect payments. Source: Borrowing and entering the repayment period — https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-line-of-credit-heloc-en-107/
Why This Is the Correct Answer
D. Under this agreement, interest-only draw-period payments give way to amortizing repayment. The ten-year draw period permits interest-only payments; those payments do not reduce principal. The agreement then amortizes the outstanding balance over twenty years. The $75,000 credit limit is not itself the amount owed. Scope and exceptions: The balance entering repayment may differ from today’s $30,000 if there are additional draws or principal payments. Not every HELOC has this schedule; some require a balloon. Amortization does not mean a fixed rate, and rates can affect payments.
Why the Other Options Are Wrong
Option A: The whole $75,000 becomes due at the end of the 10-year draw period
It treats undrawn capacity as debt and contradicts the stipulated repayment schedule.
Option B: Payments amortize the $30,000 over the full 30 years from the start
It spreads repayment over thirty years instead of applying the specified two phases.
Option C: Payments are interest-only for the entire 30 years of the arrangement
It ignores the required principal repayment after the draw period.
Exam Tip
Read the draw and repayment terms separately, using the outstanding balance rather than the line limit.
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