You’ll actually start repaying your HELOC before the repayment period.
While a home equity line of credit (HELOC) is often compared to a credit card or second mortgage, its repayment structure is different from any other loan type of credit line. So then how does a HELOC repayment work, you might ask.
HELOCs have two periods: the draw period and the repayment period. Each period is defined by what you can do with the HELOC and what payments are required. This guide will walk you through the HELOC repayment process.
How Does a HELOC Repayment Work?
The HELOC repayment period is a bit of a misnomer since you’ll have to pay back part of the loan during the draw period. Don’t worry, it’s just minimum payments on the interest of any money withdrawn during that time.
Let’s say you have a $100,000 HELOC and you withdraw $10,000. If you have an 8% interest rate, the average rate as of this writing, you’ll pay that amount on the $10,000 you took out, not the entire credit line. Your monthly payment will vary depending on your lender, credit score, and interest rate.
Also, keep in mind that most HELOCs have a variable interest rate, meaning your monthly payments will fluctuate unless you convert to a fixed-rate HELOC.
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, plus interest.
As with any loan, you can repay the HELOC early so long as there are no fees for doing so.
HELOC Repayment Timeline
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 HELOC lenders may offer a lower introductory interest rate for a short time at the beginning of the draw period.
“Make sure to read the details and ask about any upfront costs, annual fees, or penalties for early repayment,” says Jose Garcia, president and CEO of Northwest Community Credit Union. “These can add up and affect the overall cost of the loan.”
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.
“This can lead to higher monthly payments, so it's important to plan accordingly,” Garcia says.
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.
The Bottom Line
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 plan to pay off the HELOC during the repayment period.
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who has won awards for his New York City economy coverage. He has navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Jose Garcia, president and CEO of the Illinois-based Northwest Community Credit Union, which offers multiple financial services, including HELOC loans.
FAQ
Can you repay your 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.
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.
Sources
- Jose Garcia, president and CEO of Northwest Community Credit Union
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.