If you’re considering a home equity line of credit (HELOC), you should know that it operates differently than other types of financing. HELOCs have two separate periods — the draw period and the repayment period. Each period is defined by what you can do with the HELOC and what minimum payments are required. This guide can help you decide whether the HELOC repayment period will work for you.
Understanding How HELOC Repayment Works
A HELOC allows homeowners to borrow against the equity in their homes. As a revolving line of credit, HELOCs allow flexibility for homeowners so they can focus on other major expenses such as debt consolidations or home repairs. Some compare HELOCs to a credit card — and credit cards are another option for lines of credit — but there are distinct differences in how they operate.
With a HELOC, there are two periods — the draw period and the repayment period. Say you receive a $100,000 HELOC. During the draw period, you’ll be able to borrow from the line of credit up to $100,000. You’ll make monthly payments that cover the interest on the amount you borrowed. When the draw period is over, you’ll no longer be able to draw from the line of credit. At this point, you’ll enter the repayment period, which is a set number of years you have to repay the full balance of what you borrowed.
HELOC Draw Period
The draw period is the first phase of a HELOC. You’ll be given access to your line of credit and allowed to draw from it as often as you want, up to the HELOC’s limit. The limit will be based on how much equity you have in your home.
The draw period typically lasts for between five and 10 years. During this period, you’ll have minimum monthly payments to cover the interest on the amount that you’ve borrowed. Some lenders may offer a lower introductory interest rate for a short time at the beginning of the draw period.
HELOC Repayment Period
When the draw period ends, the HELOC enters the repayment period. At this point, the line of credit is closed and you can no longer borrow against your HELOC. Instead, you’ll make monthly payments that include both the interest and the principal of what you borrowed. The payments will happen over a set term, often up to 20 years. HELOCs often have variable interest rates, so your interest rate could change during the repayment period.
How to Make HELOC Payments
Typically, there are four ways to make HELOC payments:
- Set up automatic payments to be withdrawn from your checking or savings account.
- Make monthly payments online through your lender’s website or another portal.
- Make monthly payments by calling your lender.
- Mail checks to your lender each month.
The payment options might vary based on your lender, and your lender will let you know how you can make your payments. Pay attention to your payment due date to make sure you don’t miss any payments.
How to Calculate HELOC Payments
During the draw period, you’ll only be required to pay the interest on the amount you borrowed. You can calculate your payments by multiplying your HELOC’s interest rate and the amount you borrowed, then dividing that by 12. For example, if you borrowed $10,000 and you have an interest rate of 7%, your monthly payment would be $58.33.
When you enter the repayment period, the HELOC payments are calculated on an amortization schedule, just as mortgage payments are. During this period, you’ll need to pay back the balance of what you borrowed in addition to the interest on that balance. So you’ll use your interest rate and the amount owed in relation to the repayment term that has been set by your lender.
How to Reduce HELOC Payments
It’s possible to reduce your HELOC payments. Here are a few options for you to consider.
Convert Variable-Rate to Fixed-Rate Loan
Most HELOCs come with a variable interest rate. However, once you enter the repayment period, it may be possible to convert the balance to a fixed-rate loan. This can help reduce your HELOC payments over time because your rate — and as such, your monthly payment — cannot be increased.
Open a New HELOC
In some cases, you may be able to open a new HELOC and roll over some or all of the original HELOC’s balance. This will allow you to enter another draw period, so you’ll be back to interest-only payments.
Refinance Your HELOC
Depending on the amount of equity you have in your home, refinancing a HELOC might be an option. You can seek out a home equity loan, which comes with fixed monthly payments. Or you can look into a cash-out refinance, which can help you take out a new, higher-priced mortgage and use the leftover cash to make HELOC payments.
Can You Pay Off a HELOC Early?
If you’re considering paying off a HELOC early or making payments toward the principal during the draw period, it’s important to check with the lender’s terms. Some lenders charge a penalty fee for early repayment. This can be a flat fee or a percentage of the outstanding balance. Even if there is a penalty, you can still pay it off early, but you should consider whether you’ll save enough on interest payments to make up for the penalty fee.
Find the Best HELOC Providers From Benzinga’s Top Mortgage Companies
Not all lenders offer HELOCs, but there are some wonderful options out there. Here are a few that you should look into.
- Best For:Online MortgagesVIEW PROS & CONS:securely through Rocket Mortgage (formerly Quicken Loans)'s website
- Best For:Flexible Mortgage OptionsVIEW PROS & CONS:securely through Angel Oak Mortgage Solutions's website
- Best For:Self-employed BorrowersVIEW PROS & CONS:securely through CrossCountry Mortgage's website
Things to Consider About Repaying a HELOC
HELOCs are an attractive option. They are a revolving line of credit and only require payments on interest during the draw period. However, you need to think about HELOCs in the long term and create a plan to ensure that you can use the funds wisely during the draw period and also have a plan to pay off the HELOC during the repayment period.
Frequently Asked Questions
What is the monthly payment on a $50,000 HELOC?
This will depend on the interest rate, how much you borrow and whether you are in the draw or repayment period.
Do you pay monthly on a HELOC?
Yes. During the draw period, you’ll only be required to pay the interest on the amount you borrow, and during the repayment period, you’ll pay the principal and interest.
What are the typical repayment terms for a HELOC?
Typically, the draw period can be up to 10 years, and the repayment period can be up to 20 years.