Americans owed $481 billion on home equity lines of credit at the end of September, up $23 billion from the previous quarter. That was the biggest quarterly increase since 2005 and the 18th straight quarterly rise, according to the New York Fed’s household debt report, released November 10.
The $23 billion is the net change in what borrowers owed. It isn’t the amount they took out in new loans. The report, based on a nationally representative sample of Equifax credit records, separately shows that total credit limits on these lines rose $31 billion. A credit limit is borrowing capacity; a balance is debt already owed.
For a homeowner, the distinction shows up in the monthly bill. A home equity line of credit, or HELOC, lets you borrow against the equity in your home during a period when you can draw on the line. The Consumer Financial Protection Bureau explains that these lines usually carry variable rates. Your payment can rise even if you haven’t borrowed another dollar. The home secures the debt, so falling behind can put it at risk.
Two ways the same $30,000 balance can cost more
Suppose you owe $30,000 on a line that requires only interest during the draw period. At an illustrative annual interest rate of 8%, the simplified monthly interest bill is $200. At 9%, it’s $225. That’s $25 more a month on the same balance. Both estimates divide the annual rate by 12 and apply it to the outstanding balance.
Now suppose the draw period ends and the lender requires you to repay the same $30,000 over 10 years. If the rate stays at 9% and the loan is paid down in 120 equal monthly installments, the payment is about $380, including principal and interest. That’s about $155 more than the interest-only payment at 9%, even without another rate increase. The example excludes fees and uses a simplified monthly calculation; the rates are assumptions, not offers.
The CFPB notes that repayment terms vary: some lines require the whole balance to be repaid as soon as the draw period ends. For a household budget, check the date you lose access to new draws, how the rate can change, what fees apply and what the first payment will be after the draw period. The credit limit alone won’t answer any of those questions.