How Does HELOC Repayment Work?

What you need to know before the draw period ends

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If you own a home with equity, a home equity line of credit (HELOC) can help you access that cash without selling or refinancing the property. HELOCs act as a credit line that uses the equity of your home as collateral.

A HELOC isn’t permanent. Once the draw period ends, you’ll need to start making payments on your debt. Let’s take a look at how HELOC repayments work, how you transition from receiving funds to making payments, and your options during this process.

Key Takeaways

  • A home equity line of credit (HELOC) is a revolving line of credit that uses your home as collateral. 
  • HELOCs have a fixed draw period during which you can access the funds in your line of credit. 
  • Once the HELOC’s repayment period begins, you’ll need to repay both principal and interest.
  • If you aren’t happy with the terms of repaying your HELOC, you have other options. 

What Is the Repayment Period?

A HELOC works much like a credit card. You’ll have a fixed line of credit against which you can make charges, then you’ll need to pay those charges back. Where a HELOC differs, however, is the required payment you’ll need to make. 

Lenders must give you three business days from when you open a HELOC to cancel, no matter your reason.

HELOCs have a set draw period, which will usually last from five to 10 years, during which you’ll only need to pay interest on the amount you owe. However, once the draw period ends, you’ll lose access to the funds and will need to pay back the full amount, including principal and interest.

Transitioning From the Draw Period to the Repayment Period

The transition from draw to repayment can significantly affect your budget, especially if you’ve had interest-only payments on your HELOC. 

Once the draw period has closed, you’ll enter the repayment period, which is when you’ll begin paying back the total amount you owe, including principal and interest. Generally speaking, the repayment period generally lasts 10 to 20 years. Be aware that a HELOC generally operates on a variable APR, which can mean that your payment amount may fluctuate as interest rates change.

The interest you pay on your HELOC may be tax-deductible, but that depends on your personal situation. Consider consulting a tax advisor to see if you can deduct your interest payments.

Aside from budgeting for extra expenses, you’ll want to carefully consider your options for repayment. There are a variety of paths you can take, which we explain in more detail below. 

Be sure you understand the fees or additional costs you may incur while making payments. For example, some lenders may charge prepayment penalties if you pay off your HELOC early. 

How To Make HELOC Payments

You’ll be making interest payments on your HELOC from the time the draw period begins. Once it ends, you’ll need to start paying back the principal you owe as well.

You’ll work with your lender to set up payments for your HELOC, which is similar to setting up payments for other types of loans. It can often be done online. 

If your lender supports online payments, you’ll want to navigate to your account and the page for the HELOC itself. From there, you can opt to make a payment using your bank account. Otherwise, you may be able to call your lender and make a payment by phone. You can often make either a one-time payment or set up automatic payments. 

Your Options During the Repayment Period

If when the HELOC draw period ends, you don’t feel comfortable with your current loan payment, you do have options, such as renewing your HELOC, making additional payments, or applying for a different loan. 

Renew Your HELOC

Renewing your HELOC can reset the draw period, deferring the payments you’ll need to make on your principal. Be aware, however, that you’ll need to make interest payments on your renewed HELOC as well. 

Make Additional Payments During the Draw Period

You can make additional payments during the draw period, which can help reduce the monthly total you’ll owe later. Payments during the draw period typically go toward interest, and additional payments can be applied toward lowering your principal. However, be aware of any penalties your lender may charge if you make additional payments. Some lenders have prepayment penalties. 

Apply for a Different Loan

If you’re looking to close your HELOC as quickly as possible, you may want to consider applying for a different loan. Once approved, you can use the proceeds to repay the HELOC. Types of loans you can consider include a home equity loan, a cash-out refinance, or a personal loan. 

Frequently Asked Questions (FAQs)

How do you calculate the length of the HELOC repayment period?

Lenders must tell you the payment terms of your HELOC before you agree to the loan, according to the Federal Trade Commission.

What are typical repayment terms for a HELOC?

Repayment terms will vary according to the lender, but you can generally expect your repayment period to extend anywhere between 10 and 20 years. 

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