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.

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.

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.

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.

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:

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:

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

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