What is the HELOC Draw Period? How to Prepare for the Draw Period End
If you have equity in your home — meaning the current market value of your home exceeds what you owe on your mortgage — you have a powerful borrowing tool.
Because you have equity in your house, you can tap into it with a home equity line of credit (HELOC), giving you access to a revolving line of credit.
HELOCs often have low interest rates, and you can use the money you borrow for home renovations, to pay for your child’s college education, or even to pay for a dream vacation.
But before you submit your HELOC application and start borrowing money, it’s important to understand how HELOCs work, particularly with draw and repayment periods.
Here’s what you need to know about these two phases and how to prepare for the HELOC draw period end date.
HELOC Draw Period vs. Repayment Period
Unlike some other home improvement loans or personal loans, HELOCs are revolving lines of credit.
Instead of using them once for a one-time expense, they function like a credit card. You can repeatedly use them to get the money you need to pay for necessary expenses as they come up.
How much money you can borrow is dependent on your home’s appraised value minus what you owe on your mortgage.
In general, you can borrow up to 85% of your home’s equity.
For example, if your home was worth $250,000 and you owed $150,000, that means you could borrow up to $85,000 with a HELOC.
In terms of repayment, HELOCs usually use variable interest rates, and there are two key terms you should keep in mind:
- Draw period: The draw period is the length of time during which you can access your funds and borrow money. Once the draw period ends, you can’t access the funds any longer. While not all banks are the same, the average draw period is 10 years.
- Repayment period: When the draw period ends, the HELOC enters repayment. During the repayment period — which is often 20 years in length — you will typically make payments against the principal and interest to pay off the outstanding balance of your credit line.
Combined, the draw period and repayment period can last 25 to 30 years.
How the Draw Period Works
When you’re approved for a HELOC, the lender will outline the HELOC’s terms, including the terms of the draw period — the amount of time you have to withdraw money from the HELOC.
Every lender has their own requirements, but some lenders may require you to make minimum draws during the draw period.
You can opt to take out the minimum required during the draw period, or you can take out the maximum offered.
It’s up to you.
The money is available if you need it, and you’ll only pay interest on the amount that you actually draw.
For example, if you’re approved for a $85,000 HELOC but you only take out $25,000, you’ll pay interest on the $25,000 you use — not the $85,000 you were approved for originally.
To access your HELOC funds, you can usually do a bank transfer, or you can even use a HELOC account card which functions like a debit card.
During the draw period, you usually do have to make some form of loan payment each month.
Typically, you just have to make interest-only payments, so the monthly payments are quite low during the draw period.
Preparing for Draw Period End Date
During the draw period — which can last for up to 10 years — your payments are usually small.
Once the draw period ends, you’ll have to start making full payments of both principal and interest.
Or, you may have a balloon payment, which means the remaining balance becomes due. A balloon payment, a large lump-sum payment, is then required.
If you’re not prepared, the end of the draw period and the start of the repayment period can come as a shock and it can be financially devastating.
To avoid any surprises, consider these options to prepare for the HELOC draw period end date:
1. Review your loan terms
Make sure you understand your loan terms, including your interest rates.
In most cases, HELOCs have variable interest rates, meaning the interest rate can fluctuate over time, so your payments can fluctuate, too.
Double-check your HELOC paperwork to see if your HELOC requires a balloon payment once the draw period ends, or if you have a repayment period where you make principal and interest payments.
If that’s the case, you may make payments for 10 years or more.
2. Start repaying the principal and interest
If your HELOC is eligible for principal and interest payments, create a budget and cut back on your expenses so you can afford your monthly payments.
If possible, sign up for automatic payments to avoid missing a payment and falling behind and incurring late fees or penalties.
3. Pay off the balance in full
If your HELOC requires a balloon payment, or if you simply want to pay off your HELOC as quickly as possible, another option is to pay off the remaining balance in full.
If you have the money stashed away in savings, using it to pay off your HELOC can be a smart way to save money on interest charges.
4. Apply for a new home equity line of credit
In some cases, you may be able to apply for a new HELOC or another home loan.
If you have an outstanding balance on your current HELOC and are approved for a new loan, you can move your balance over, giving you more time to manage your debt.
Talk to your lender about your options.
Risks of Falling Behind on Your HELOC Payments
Why is it so important to pay attention to the HELOC draw period end date?
There are serious consequences to falling behind on your payments.
With a HELOC, you’re required to use your home as collateral on the loan; that’s why your interest rates are typically lower than you’d get with unsecured loans.
If your payment is late or you can’t afford your payments at all after the draw period ends, the lender may be able to force you to sell your home to repay the debt.
To prevent that from happening, make sure you make all of your payments on time.
If you can’t afford your payments because of a job loss or medical emergency, contact your lender to see if there any alternatives programs you’re eligible for until you can get back on your feet.
When it comes to HELOCs, there are many different factors you should keep in mind, including closing costs, interest rates, and the draw and repayment periods.
By understanding how long the draw period is and when your repayment phase begins, you can come up with a plan for managing your payments so you’re not caught off guard.