If you have a home equity line of credit, you probably know that your HELOC includes two main phases: the HELOC draw period and the HELOC repayment period.
Combined, these two periods typically last up to 25 or 30 years. However, before your HELOC draw period ends, you should take stock of your outstanding balance and decide whether or not you can afford to repay it with your current interest rate.
What is a HELOC draw period?
The draw period of a HELOC loan works like an open line of credit. You’re given a set line amount that you can draw funds from, which is based on the equity in your home. You can borrow up to the limit, pay it back and then borrow more money as many times as you want until the draw period comes to a close.
The money from your HELOC can be used to pay off other higher-interest debt, make home improvements, remodel and more. During this period of the HELOC, which typically lasts between five and 10 years, only interest is due on the money that you’re borrowing, although you may be charged minimum monthly payments.
To illustrate how minimum monthly payments work during the draw period, let’s say you withdraw $50,000 at a 5 percent interest rate using a HELOC with a 10-year draw period and a 15-year repayment period. Your minimum monthly payment during the draw period — when you’re only required to pay interest — would be $208.33.
Once the draw period is over, you cannot borrow from the loan again without refinancing it first.
What is a HELOC repayment period?
After the draw period of a HELOC is over, you enter what’s known as the repayment period. At this point, the loan converts to a repayment schedule, during which both principal and interest will be due every month. Because you’re only charged for your outstanding balance at the end of your draw period, your monthly repayment amount will largely depend on how much you’ve borrowed.
Repayment periods vary based on the terms of your agreement but typically last 10 to 20 years. During this time, you will not be able to make additional draws.
What to know before your draw period ends
As your HELOC nears the end of its draw period, take stock of your loan so that you’re fully prepared for what comes next.
Know exactly when your draw period expires
Typically, a HELOC’s draw period is between five and 10 years. Once the HELOC transitions into the repayment period, you aren’t allowed to withdraw any more money, and your monthly payment will include principal and interest.
It’s important to be clear about when the draw period ends in order to adequately prepare yourself for the next phase. “This will help you plan for necessary expenses and ensure that you have the funds available to help you with your life’s priorities, including those that may be in the future,” says Michelle McLellan, senior product management executive at Bank of America.
Keeping track of your draw period can also help you determine whether you want to refinance the HELOC or begin putting money into savings to use toward paying down the principal during the repayment period.
However, if your HELOC balance is already at zero at the end of the draw period, your account will typically close automatically, McLellan says.
Understand what you’ll owe if you enter the repayment period
Knowing the full amount of the principal and interest payment before you enter the repayment phase helps you avoid surprises. Principal and interest payments can cause a significant change to a budget, and these payments will last anywhere from 15 to 20 years.
“It’s critically important to understand what you will owe during the repayment period,” says Adam Marlowe, principal market development officer for Georgia’s Own Credit Union. “Not only will it help you better budget down the road, but it may impact some decisions about your repayment. If you have a variable-rate loan and you’re in a rising-rate environment, it may make sense to begin paying off your balance early, before your repayment period begins. Or, you may want to refinance into a fixed-rate loan for greater payment stability.”
Jon Giles, senior vice president of home equity at TD Bank, recommends reaching out to your lender well in advance of the repayment phase and asking the following questions:
- Will there be a change in my interest rate during repayment?
- Will my repayment interest rate be fixed or variable?
- What is the change in payment per month?
Most lenders begin notifying customers at least six months before the end of their draw period, Giles adds. However, if you’re unsure of when the loan will move into repayment, contact your lender’s service department.
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.
- 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. Refinancing to a fixed-rate HELOC could 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 traditional home equity loan: If you’re worried about varying interest on your HELOC, you can look into refinancing your line of credit into a traditional home equity loan. Similar to a HELOC, a home equity loan allows you to borrow money based on the equity you have in your home.This option gives you a fixed APR, fixed payments and a set repayment timeline. “Rather than having a revolving line of credit, you receive a lump sum and make fixed payments until the loan is paid off,” Marlowe says.
- Pay your HELOC off: If you have the extra cash, it might make sense to repay your HELOC entirely or lower the balance by applying additional amounts toward the principal.
- Roll the HELOC balance owed into a first-mortgage refinance: You may also be able to consolidate the outstanding balance on a HELOC into a refinance of the first mortgage on your home, McLellan says. “If approved, this will result in a single, regular monthly payment, although you will lose the ability to make future draws,” she says. If you choose this route, make sure to research closing costs and current mortgage rates.
As you consider these options, keep in mind that there is no one right approach, McLellan says. “Which option is best for you depends on your unique situation. You can work with your lender to explore your options and determine the solution that best meets your needs.”
Weighing all of your options
Before your HELOC draw period ends, it’s a good idea to have a repayment plan in place if you owe money. Check with your lender to see exactly how much your monthly payments will change once the principal portion is due.
If you can’t afford the change in monthly payments, need to borrow more money or don’t like having a variable interest rate, explore alternatives. Be sure to weigh the pros and cons of each option before making a decision. For example, when you refinance into another HELOC, you could incur additional costs, such as early closure fees, annual fees and application fees.
In addition, it’s best to compare rates and fees from various lenders if you choose the refinancing route.