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What is a HELOC repayment period?

How HELOC draw and repayment periods work

A home equity line of credit, or HELOC for short, is a type of home equity loan. It is divided into two distinct periods: the initial draw period where you can withdraw funds from your credit line and the secondary repayment period where you pay off the balance. 

Key Points:

  • A HELOC typically has a draw period and a repayment period

  • During the draw period, the borrower can withdraw funds from the line of credit and is only required to make minimum payments on the accumulated interest

  • During repayment, borrowers can no longer withdraw money from their credit line and must make payments on interest and the loan balance

  • Repayment terms vary by lender on how long the borrower has to pay off the loan (usually 10-20 years)

  • Some HELOC lenders will allow you to pay down your balance during the draw period, while others charge prepayment penalties

  • When a HELOC enters repayment, borrowers can choose to continue with the loan terms that they have, renew their draw period, or convert their loan balance to a loan with different terms

HELOC basics: Withdrawal and Repayment

A home equity line of credit is a rotating line of credit, based on the equity you have built up in your home (that is, the portion of your home that you own compared to the portion owed to the bank). Unlike a traditional home equity loan, where you receive a single lump sum payment, with a HELOC you have a line of credit (like on a credit card) from which you can withdraw funds as needed.

A HELOC is divided into two clear periods. The first is the draw period, which typically lasts 5-10 years. During the draw period, borrowers can withdraw funds as needed up to their credit limit. Throughout this time the borrower makes interest-only payments. Many modern HELOCs allow you to make payments on the principal as well during this first portion of the loan, although some will charge you an early repayment fee, others allow you to pay off your balance early without penalty.

After ten years, the draw period ends and the repayment period begins. 

What is a HELOC repayment period?

After the draw period, borrowers enter into the repayment period during which they need to pay both principal and interest monthly. Typically the repayment period last 10-20 years. The monthly repayment amount largely depends on how much was borrowed at the end of the draw period and the terms of repayment agreed to at the start of the loan. During this time it’s not possible for borrowers to make additional draws from their credit line.

Repayment terms vary by lenders in terms of the length of time you have to pay off the balance completely. Some HELOC lenders require a balloon payment at the end of the draw period, in which you are required to make a one-time large payment for the balance in full on your loan. 

If you have been making principal payments toward the balance on your HELOC during the draw period, your monthly payments might not increase much. However, if you have only been making minimum payments on the interest, you will see a sizeable increase on your monthly bill.

Whether you have a variable- or fixed-rate HELOC will also influence how much your monthly payments will be. If you have a variable interest rate, your payments could go up or down. The banking institution will have a specific policy on how the interest rate is determined and if there is a cap on how much your rate can increase in a period of time. Fixed-rate HELOCs will have more predictable payments over time. 

It’s important for prospective HELOC borrowers to understand how long their repayment period will be before entering a contract with a lender. Knowing this could help you plan for how long you have to access funds, how much debt are comfortable taking on, and how to plan to pay back the loan. Additionally, understanding plan repayment length can help you assess whether or not you can afford a HELOC at all as well as shop around for lenders offering better terms or shorter repayment periods depending on your needs.

HELOC repayment versus home equity loan repayment

HELOC repayment periods are quite different from home equity loan repayments. In a traditional home equity loan, borrowers receive a lump sum payment at the start. Then, throughout the duration of the loan make fixed monthly payments on interest and the principal balance. The monthly payments on a home equity loan remain consistent throughout, especially if it has a fixed interest rate. This can be a good option for those who need to use the full amount of the loan upfront and are able to make larger payments off the bat.  

For others, the borrowing and repayment flexibility of a HELOC makes more sense. With a HELOC, you can draw on your line of credit as needed up to the predetermined limit. This allows you to only pay interest on the portion of the credit line that you use, instead of on the entire loan amount. It's a good choice if you need to make frequent, but smaller, withdrawals. 

How to prepare for HELOC repayment

There are several options to consider as a home equity line of credit nears the repayment phase. The first is to continue with the HELOC terms that you agreed to at the start of the loan. However, if you are concerned that you may not be able to make minimum monthly payments, you can consider some alternatives. 

The easiest option is often to ask for a renewal on your draw period from your lender. Essentially, you qualify for a new HELOC, which is used to pay off the outstanding balance on your old one and start with a new interest-only draw period on the new loan. Another option is to convert your HELOC. If you have a variable rate loan, you may be able to convert your balance to a fixed rate, giving you more ability to predict the size of your loan payments over time. 

The takeaway

The repayment period of a HELOC is the second part of the loan, in which borrowers make payments on the full balance of the loan as well as on interest. The start of the repayment period might be a bit overwhelming, especially if you have been making interest-only payments throughout the draw period.  In order to prepare to pay off a HELOC, it’s necessary to understand the exact repayment terms of your loan. Your loan agreement should explain how long you have to pay off your full balance, and how interest will be charged dring the remainder of the loan. When in doubt about being able to make payments on your credit line, it’s best to contact the lender as soon as possible in order to find the best ways to prevent default. 


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