HELOC Terms: How Draw and Repayment Periods Work

A home equity line of credit (HELOC) allows you to borrow against your home's equity, offering flexibility through two phases: the draw and repayment periods. During the draw period, you can borrow funds as needed, while the repayment period focuses on paying back what you've borrowed and interest.

Understanding HELOC terms, such as how long each period lasts and how payments are structured, is important because these factors can impact your overall financial picture. We explain how these terms work and what they mean for your costs and repayment strategy.

Key Takeaways

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HELOC terms typically include a 5- to 10-year draw period and a 10- to 20-year repayment period, with varying interest rates.

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HELOC terms affect costs through variable interest rates and potential balloon payments during repayment.

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Reduce HELOC payments by paying down principal during the draw period or refinancing to secure a lower interest rate.

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You may be eligible for a HELOC. Because you have an LTV at or below 85%, you may be approved for a home equity line of credit.
10 Years Payoff Scenario
$732/mo
Eligible to Borrow
$62,500
Loan-to-Value Ratio
80%
Note: Lenders set varying limits on the acceptable Loan-to-Value (LTV) ratio, depending on the property type (owner-occupied or investment). Typically, owner-occupied homes have a higher acceptable LTV, often capped at 85%.

Understanding HELOC Terms

Understanding HELOC terms is important for managing your loan effectively. With a HELOC, you can access funds during the draw period, making it useful for major expenses like home improvements. However, if you're not careful, the repayment period can strain your budget, especially with variable rates. Let's explore how the draw and repayment periods work.

What Is the HELOC Draw Period?

The HELOC draw period is when you can borrow against your home’s equity, much like a credit line, typically lasts five to 10 years. Unlike a home equity loan or cash-out refinance, which provides a lump sum upfront, a HELOC lets you access funds as needed. This can be especially helpful for covering ongoing or unexpected expenses, like home renovations or medical bills, without taking on a large lump sum of debt all at once. During this time, you typically have two payment options:

  • Interest-Only Payments: You can choose to pay only the interest on your borrowed money, keeping your monthly payments lower. However, this will not reduce the principal balance.
  • Principal and Interest Payments: Some lenders allow you to pay the principal and interest down. This reduces your overall balance sooner, lowering the amount you’ll owe during repayment.

What Is the HELOC Repayment Period?

Once the draw period ends, the HELOC repayment period begins. During this phase, you can no longer borrow additional funds and must focus on repaying both the principal and interest on what you've borrowed.

The repayment period usually lasts 10 to 20 years. Unlike the draw period, where you might have made interest-only payments, the full repayment period requires higher monthly payments as you pay down both the loan balance and interest.

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INTEREST-ONLY PAYMENTS VS. FULL REPAYMENT

During a HELOC’s draw period, you can usually choose between making interest-only payments or paying both the principal and interest. Interest-only payments keep your monthly costs low but don’t reduce your loan balance, leaving you with more to repay later.

Once the HELOC repayment period begins, full principal and interest payments are required, increasing your monthly payments. Paying down the principal earlier can make the repayment phase more manageable.

How HELOC Terms Affect Your Costs

HELOC terms play a role in determining your overall costs. Factors like term length, interest rates and penalties can all impact how much you’ll ultimately pay over time. Here are some key aspects to consider:

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    Term Length and Rates

    A longer repayment term may lower your monthly payments but increase the total interest you pay over time. Shorter terms could save on interest but lead to higher payments.

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    Variable Rates During Repayment

    Most HELOCs have variable interest rates, which can change over time. If rates rise during the repayment period, your monthly payments could increase.

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    Balloon Payments

    Some HELOCs may require a large lump-sum payment at the end of the repayment period. This can be a financial shock if you’re not prepared for it.

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    Possible Penalties

    Prepayment penalties or fees for closing your HELOC early can add unexpected costs. Make sure you understand these fees before borrowing.

Tips to Manage Your HELOC Terms

Managing HELOC terms effectively is essential for controlling your finances during the draw and repayment periods. Here are some tips to help you stay on top of your loan and avoid unnecessary costs:

  1. 1
    Create a budget for the draw period

    Track your borrowing to ensure it's for planned or essential expenses. The more you borrow, the higher your future payments will be.

  2. 2
    Make principal payments early

    Even during the draw period, consider paying down the principal. This reduces your debt before repayment begins, easing future financial pressure.

  3. 3
    Plan for rate fluctuations

    If your HELOC has a variable interest rate, build a financial cushion. Setting aside extra funds can help cover potential rate increases.

  4. 4
    Avoid overborrowing

    Borrow only what you need. Maxing out your credit limit can make repayment difficult and strain your finances.

  5. 5
    Review statements regularly

    Monitor your monthly statements to track interest payments and your remaining balance. This will keep you aware of your financial standing and help you spot areas to cut back.

  6. 6
    Prepare for the repayment period

    As the draw period ends, review your budget to prepare for higher monthly payments, including principal and interest. Adjust your finances accordingly.

How to Reduce HELOC Payments

Understanding your HELOC terms is key to reducing payments, especially as you transition from the draw period to repayment. You can lower your payments in several ways. Here are some to consider:

Option
What It Is
Who Should Consider It

Convert to a Fixed-Rate Loan

Change a variable-rate HELOC to a fixed rate for stable monthly payments.

Borrowers seeking predictable payments over the repayment period.

Renew Your HELOC

Reapply for a new HELOC at the end of the draw period to extend interest-only payments.

Borrowers looking to extend the draw period and delay repayment.

Refinance with a Home Equity Loan

Refinance your HELOC with a fixed-rate home equity loan.

Borrowers who prefer fixed, consistent payments over time.

Cash-Out Mortgage Refinance

Refinance your mortgage and use the cash to pay off the HELOC.

Borrowers with enough equity and a lower mortgage interest rate.

These strategies can help reduce HELOC payments by allowing you to adjust your loan terms before the repayment phase begins.

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WHEN SHOULD YOU REFINANCE YOUR HELOC?

You should consider refinancing your HELOC if you're approaching the end of the draw period and are worried about higher payments during the repayment phase. Refinancing can be beneficial if you have a variable-rate HELOC and expect interest rates to rise, as switching to a fixed-rate loan can provide more predictable monthly payments.

Another good time to refinance is if you've built significant equity in your home and can qualify for better terms. For instance, refinancing with a lower interest rate or switching to a home equity loan with fixed payments can make managing your overall debt more straightforward.

FAQ: HELOC Terms

From payment options to early payoff, here’s what you need to know about managing your HELOC effectively.

What are the terms for HELOCs?

How do HELOC payments work?

Should I opt for interest-only payments during the draw period?

Can you pay off your HELOC early?

What’s the difference between a HELOC and a home equity loan?

About Zachary Romeo, CBCA


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Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.

Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.