What Is a Draw Period in a HELOC?

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DEFINITION
A draw period in a home equity line of credit (HELOC) is the amount of time you have to tap into the available credit.

A draw period in a home equity line of credit (HELOC) is the amount of time you have to tap into the available credit.

You can use a home equity line of credit (HELOC) to fund just about any expense as long as you have equity in your home, including home renovations, college, or even a vacation. Let’s take a closer look at what a draw period is and how it works, so you can determine if a HELOC is a good option for your needs.

Definition and Example of a Draw Period in a HELOC

The draw period is the time frame during which you can withdraw money from your HELOC up to your set credit limit. It varies from lender to lender, but it’s usually from five to 10 years. You’ll write special checks or use a credit card to access funds during the draw period.

Your HELOC amount will also depend on the amount of your home equity. For eample, let’s say you take out a $150,000 HELOC with a 10-year draw period. You’ll have 10 years to borrow money from the total credit available to you.

Some HELOCs require that you draw a minimum amount of money upfront.

How a Draw Period in a HELOC Works

You’ll only have to pay interest on the amount you borrow during the draw period. You might be able to make payments on the principal, too, depending on your terms. You may also pay off the HELOC in full, although you might be on the hook for a penalty if you do so.

Your HELOC will officially close, and the repayment term will come into effect when the draw period comes to an end. This is when you’ll pay back the amount you borrowed during the draw period, typically over 20 years. You can expect your payments to increase a great deal because you'll be paying both principal and interest.

Your HELOC may also have a balloon payment. This requires you to repay the entire balance (principal and interest) at the end of the draw period.

How To Prepare for the End of a Draw Period

You can take certain steps to prepare for the end of the draw period. First, make sure you read the fine print and understand your HELOCs terms. You should know exactly when your draw period will end.

Figure out how much you’ll owe after the HELOC closes as you get closer to the end of your draw period. You should also know how long your repayment period will last and what your monthly payments will be.

It’s a good idea to pay back some of your principal during the draw period. You won’t owe as much when the repayment period hits if you do so. You won’t have to take any further action or make any other payments if you repay your entire balance during the draw period.

Your HELOC payments will likely change during the repayment period because most HELOCs come with variable interest rates.

HELOC Repayment Options

Ideally, you’ll pay off your HELOC in full during the draw period. This can save you a great deal of money on interest. You can improve your credit score if you make timely payments during and after your draw period, too.

If you're not able to do that, consider these other repayment options:

  • Refinance to a different HELOC: You can take out a new HELOC and use the balance to repay your outstanding loan if you have solid credit. Pay as much as you can during the draw period of the new HELOC so you can cut your interest charges.
  • Opt for a cash-out refinance: You replace your current mortgage with a new mortgage for more than your previous balance when you do a cash-out refinance. You can pocket the difference in cash and use it to repay your HELOC.
  • Refinance to a home equity loan: A home equity loan allows you to borrow against the equity in your home just as a HELOC does. However, it's different because it allows you to make fixed monthly payments over time. You can use a home equity loan to pay off a HELOC. Just remember that you’ll have to repay your home equity loan, as well.

Key Takeaways

  • A draw period is the amount of time you're entitled to draw funds from a home equity line of credit (HELOC).
  • You’ll only have to pay interest on the amount you borrow during the draw period.
  • The repayment period will come into effect when the draw period is over, and you’ll be required to repay your entire balance.

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