What to Know About HELOC Draw and Repayment Periods

If you’re interested in tapping into your home’s equity for funds, a home equity line of credit (HELOC) can be a great financial tool to get you the cash you need. Similar to a credit card, HELOCs provide you with a revolving line of credit you can utilize. Though the maximum amount you can withdrawal is determined by the equity in your home, you can take out as much or as little as you need during the HELOC’s draw period.

In this article we’ll detail exactly what a HELOC draw period is, plus how the repayment period works.

What is a HELOC draw period?

A HELOC’s draw period refers to the period of time during which a borrower can withdrawal funds from the line of credit. Draw periods vary in length depending on each one’s terms, but typically range between 5 and 15 years. Ten years is the most common draw period length.

During the draw period, you’ll be able to take out any amount of money you need as long as it does not exceed the maximum limit of the HELOC. This limit is determined by the amount of home equity you have available.

It’s important to note, that even though there is a dedicated repayment period after the draw period ends, you will still be making minimum payments during said draw period. These payments will pay the interest that is due on the balance you take out only.

What is a HELOC repayment period?

Once the draw period ends, your HELOC transitions to the repayment period and no more money may be spent on the credit line. During this repayment period, you’ll be working to repay what you borrowed. This means your monthly payments will increase to include the interest and principal owed over a set term.

The length of this term will vary depending on the length of your draw period. Typically, a 10-year draw period will be followed by a 20-year repayment period. 

Prepare before your HELOC draw period ends

Though HELOCs are great to turn your home’s equity into usable funds, many borrowers are often unprepared for the increased monthly payments when they enter the repayment period. It’s not uncommon for the monthly payments to double once this period starts. It’s vital to evaluate your budget prior to taking out a HELOC so you can calculate what you may be able to afford. There are some strategies you can utilize to mitigate the amount of payment due after the end of the draw period. These include making more than the minimum payments during the draw period or converting your balance to a fixed-rate.

Remember, even though you may have a good chunk of equity available, you’re not required to take out the maximum amount. The less you use from your line of credit, the less you’ll have to pay back. Only take out what you absolutely need, then focus on making timely payments.

HELOC repayment options to consider

When you take out a HELOC, you’ll have a few options to repay the loan. Here are a couple of actions you can take during and after the draw period:

1. Ensure you’re making the minimum payments — it’s perfectly fine to stick with making the minimum payments during the draw period. Just be sure to keep an eye on when the repayment period begins and what your new monthly payments will look like once it does.
2. Pay more than the minimum during the draw period if you can — even though you’re only required to make interest payments on the amount borrowed, paying more can help you get ahead on the owed principal balance, too.
3. Convert to a fixed-rate — more often than not, HELOCs have variable interest rates. However, some lenders offer fixed-rate options. You may even be able to convert some or all of your balance to a locked-in rate option. Keep in mind that most lenders will require you to convert prior to the end of your draw period.
4. Refinance your HELOC — another option for homeowners is to refinance their HELOC.

• Some borrowers may decide to use a cash-out refinance in order to combine their first mortgage’s balance with their second mortgage. That way both debts are rolled into one new loan.
• You can also refinance to a home equity loan. This route is best if your lender does not provide you with the choice to convert to a fixed-rate. A fixed-rate home equity loan may not be very different from your current HELOC, but it can provide certainty on your monthly payments.

It's always best to consult with your lender to review all the options you may have at your disposal. Be sure to clarify the terms of your HELOC so you can best plan out your repayment strategy.

Use your HELOC draw period responsibly

A HELOC draw period lasts for years, sometimes well beyond the time it takes to finish the project you’re using it to fund. This access to an open line of credit can be a great financial tool if you know how to use it properly. Before you sign the dotted line, make sure you understand the risks of using your home as collateral. Shop around for a lender so you can be confident you’re getting the best terms for your unique situation.