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HELOC draw period: How long it lasts and how payments work
There are several ways to turn your home equity into cash. One of the most popular? That’d be a home equity line of credit — or HELOC. Despite their popularity, HELOCs aren’t like your average loan product. No lump sum of cash gets handed over, and you usually won’t owe huge monthly payments right after closing on your loan.
Instead, you’ll go through two distinct periods: The draw period and the repayment period. Monthly payments during the repayment period are similar to other types of loans, but the draw period is what makes a HELOC unique. Here’s how the draw period works.
Learn more: 7 ways to build equity in your home
In this article:
What is a HELOC draw period?
A HELOC “draw period” is when you can withdraw money from your credit line. A 10-year draw period is pretty standard, but the exact length can vary by lender.
How HELOC draw periods work
HELOCs are sort of like credit cards. Once approved for one, you’ll have access to a hefty line of credit. You can pull money from that credit line as needed — usually using a particular card or checkbook — but only for as long as the draw period lasts.
So, if your draw period is 10 years, you have a decade to withdraw cash from your credit line. This can be helpful if you have an extended project you need to finance (maybe a large-scale renovation at your house), and you’re not sure how much you’ll need to borrow. It can also make HELOCs a smart financial safety net since they give you long-term access to funds in a pinch.
Read more: 4 types of home renovation loans and how to choose
Payments during the draw period
While in the draw period, you usually only need to pay interest on the money you’ve taken out of your HELOC fund — you don’t need to repay the principal yet. Let’s say you have a HELOC for $30,000 with an 8% interest rate and start by withdrawing $1,000. You’ll only pay the interest on the $1,000 throughout the draw period (unless you take out more later, then you’ll pay interest on the larger amount).
You have the option to pay more than that, though, if you like. For example, you might opt to repay that full $1,000 if you can comfortably afford to do so. That would then replenish your credit line to $30,000, and you could borrow that $1,000 again later — as long as you’re still in the draw period.
In some cases, a HELOC may come with a minimum monthly payment that covers interest and a small portion of principal during the draw period. The exact arrangement depends on the lender, though.
Dig deeper: What is an interest-only HELOC, and how does it work?
HELOC draw period vs. HELOC repayment period
It’s common for HELOCs to have 30-year terms. Once your 10-year draw period comes to a close, you’ll enter what’s called the “repayment period.” This is when you’ll start making full principal and interest payments to your lender. On most HELOCs, the repayment period lasts for 20 years.
The amount you’ll pay per month will depend on how much you’ve withdrawn from your HELOC, as well as what your interest rate is. As you get closer to this point in your term, you can use a HELOC payment calculator to estimate your monthly payments.
In rare occurrences, you may owe the full balance in one lump sum once your draw period ends. This is called a balloon payment.
Read more: How to get a HELOC in 6 simple steps
Preparing for your HELOC draw period to end
As the end of your HELOC draw period approaches, you’ll need to have a plan for repaying the balance.
This might mean readjusting your budget to make room for your estimated monthly payments, or you may want to explore other options. For example, you could do a cash-out refinance on your original mortgage and use the cash to pay off your HELOC balance. Just make sure the numbers work in your favor. (Refinancing means replacing your initial mortgage term and rate entirely. If that would mean losing an ultra-low mortgage rate, it may not be worth it.)
Taking out a new HELOC or home equity loan could also work. You’d simply use the funds from the new loan to pay off your existing balance. This may seem counterintuitive, but if you’re having trouble affording payments on your current HELOC, either of these second mortgages will give you the money to repay the principal.
If you get a new HELOC, you can use the 10-year draw period to work on improving your personal finances so you’re more prepared for the next repayment period. With a home equity loan, you’ll probably have 30 years to repay the principal rather than 20 years, resulting in lower monthly payments that could be easier to fit into your budget.
If you’re not sure of the right way to handle your HELOC payments, talk to a mortgage professional or financial adviser. They can help you make the right plan for your finances.
Learn more:
HELOC draw period FAQs
How soon do you have to pay off a HELOC?
With most HELOCs, you have 10 years to withdraw money from your HELOC (called the “draw period”). Typically, you will make interest-only payments during this time. Once the draw period ends, you then have 20 years after that to repay the full balance plus interest.
What happens when your HELOC draw period ends?
When your HELOC draw period ends, you’ll start making full principal and interest payments to your mortgage lender. You usually have 20 years to pay off the balance.
Do you make payments during a HELOC draw period?
During a HELOC’s draw period, you’ll usually only pay interest on the money you withdraw. You can pay more than this if you’d like, but it is not required. Regular monthly payments toward the principal and interest are not mandatory until the repayment period, which usually starts 10 years into the HELOC’s term.
How often do HELOC rates change?
Although fixed-rate HELOCs exist, these second mortgages usually have variable interest rates. The answer to how often the rate changes depends on the terms of your HELOC, but generally speaking, your HELOC rate can be adjusted monthly based on the index rate it’s linked to. This could mean a higher or lower monthly payment as a result.
Can you pay off a HELOC during the draw period?
You can certainly pay off your HELOC during the draw period, but you’re not required to. During the draw period, most lenders only require you to make interest payments. Once you enter the repayment period, that’s when monthly payments toward both the principal and interest will begin.
This article was edited by Laura Grace Tarpley.
