If you have a home equity lines of credit, you probably know your HELOC terms include two main phases: the HELOC draw period and the repayment period. Combined, these two periods typically last up to 25 years.
During the draw period, your loan works like an open line of credit. You have a set limit to borrow from, and you can borrow up to the limit of your HELOC, pay it back and then borrow it again as many times as you want.
You can use the money to pay off other higher-interest debt, make home improvements or remodel. During the draw period of your HELOC, only interest is due on the money that is borrowed. This period lasts between five and 10 years. Once the draw period ends, you cannot borrow from your loan again without refinancing it.
After the draw period you enter the repayment period, and the loan converts to a repayment schedule. Both principal and interest are due every month during this phase. The repayment period varies from 10 to 20 years.
There are a few factors you need to be clear on before your draw period ends:
- The length of your draw period and when it’ set to end
- The amount of the principal and interest payment you’ll owe each month when your HELOC goes into repayment
- Your options for refinancing or retiring the loan before the draw period ends
Know when your draw period expires
The typical HELOC terms include a draw period that is between five and 10 years depending on the lender. This is the phase when you can actively withdraw money and use the line of credit while only making the interest payments on your principal. You could access HELOC funds through withdrawal, check writing or via a transaction card for the HELOC.
After the draw period, a HELOC transitions into the repayment period. During this period, you aren’t allowed to draw money and your monthly payment includes principal and interest. It’s important to know when this period ends in case you want to refinance your HELOC or put money in savings that will go toward the principal as the repayment phase approaches.
Understand what you’ll owe if you enter the repayment period
Knowing the principal and interest payment before you enter the repayment period will help you avoid surprises.
“Even without rising interest rates, that can produce a notable payment shock,” McBride says. “The rising interest rates compound that issue.”
Principal and interest payments cause a significant change to a family budget.
“In a rising-rate environment, you don’t want to be kicking the can down the road forever on paying back that balance,” McBride says. “Sooner or later, you’re going to have to pay off that debt. And that’s better addressed now before interest rates move higher.”
Because the repayment period is 15 to 20 years, it’s important to know what you’ll owe each month. You’ll need to make sure that the amount is something you can fit into your budget. If it’s not, you may need to explore a few alternatives.
Explore alternative repayment options
There are a number of options for refinancing or retiring your HELOC before the draw period ends.
- Refinance into another HELOC with a fresh draw: Using this option, see if you can find a HELOC that has a low-APR introductory period that you can take advantage of for refinance purposes. This will help keep your payments down and give you more time before the payments on your principal are due. It will also allow you to continue to borrow from your HELOC if you need to. “That can act as a tailwind toward paying down that balance as quickly as possible and being insulated from further rate increases,” McBride says.
- Refinance into a HELOC and take a fixed-rate option: If your HELOC is a variable rate loan, you may be worried about the fluctuating payment amounts from month to month. This option will give you a fixed APR on the amount owed while still allowing you to draw on the remaining funds during the draw period.
- Refinance into a home equity loan: If you’re worried about varying interest on your HELOC, you can look into refinancing your line of credit into a home equity loan. This option gives you a fixed APR, fixed payments and lets you know when it will be paid off.
- Pay off your HELOC: If you have the extra cash, it might make sense to repay your HELOC or lower the balance by applying additional amounts toward the principal. “See if the lender will fix the interest rate on your outstanding balance on your current home equity line and then really put the hammer down on making bigger payments before the draw period ends to minimize the payment shock,” McBride says.
The bottom line
HELOC loans are a good way to pay off high-interest credit card or medical debt or to make major remodels around the house. By understanding how the two phases of a HELOC work, you’ll gain a clearer sense of how to plan financially if you decide to use one.