How to Repay a HELOC

Strategies for the HELOC Repayment Period

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A home equity line of credit (HELOC) is a revolving line of credit, similar to a credit card, that allows you to use funds over and over again until the term ends. A key characteristic of a HELOC is that the money you borrow is secured by your house and has a draw period that enables you to spend the funds as you wish. This is followed by a repayment period, during which you’ll pay back the balance of what you used.

Since the money borrowed through a HELOC can technically be used for anything, it’s made a HELOC a popular financial tool for homeowners. Before taking out a HELOC, however, it’s important to understand how repayment works, some of the risks of accessing this type of loan, and some alternatives to consider.

Key Takeaways

  • A HELOC often requires only interest payments during the draw period; you’ll start making payments toward your principal once you enter the repayment period.
  • If you’re having trouble repaying your HELOC, consider refinancing with a new HELOC, a home equity loan, a personal loan, or even your mortgage.
  • Your HELOC payment is based on your balance and interest rate, which can frequently change throughout the course of the repayment term.

What to Know About the HELOC Repayment Period

A HELOC is broken up into two periods. During the draw period, you can borrow from your HELOC for whatever purpose, and as long as you repay the funds, you can use the line of credit repeatedly. Depending on your agreement, however, you may not have to pay anything toward the principal during your draw period. Many lenders require interest-only payments.

Once your draw period ends, you’ll enter the repayment period. At this time, you’ll usually start making regular monthly payments on your HELOC as you would any other type of loan. HELOCs usually have variable interest rates, meaning your payment may also vary. In other cases, a HELOC may require that you make a lump-sum payment when the draw period ends.

Since a HELOC is secured by your home, if you sell your home before your repayment period ends, you will have to repay your full balance at that time.

Alternatives to HELOC Repayment

If you’re having a difficult time balancing your HELOC payments with your other financial obligations, it can quickly feel overwhelming. But the last thing you want to do is simply ignore the problem. Not only will your debt continue to rack up, but you could also do serious damage to your credit score. Instead, consider these alternatives to help you manage your payment.

Open a New HELOC

One option to help you manage the repayment of your HELOC—and even put off repayment temporarily—is to apply for a new HELOC. You’ll have the benefit of another draw period, during which you may not be required to make full payments. You can use this opportunity to get ahead on the repayment of your first HELOC.

However, opening a new HELOC also comes with some risks. HELOCs usually have variable interest rates. While you may be able to get a good interest rate now, there’s nothing stopping it from increasing in the future and potentially making your payments unaffordable again.

Borrow a Home Equity Loan

Rather than taking out a new HELOC to replace your current one, you might consider replacing it with a home equity loan. This type of financing is similar in that you’re using your house as collateral. The difference is that while HELOCs are lines of credit you can use again and again, home equity loans are term loans. You borrow the money once, then repay it based on a fixed schedule.

Unlike HELOCs, home equity loans often have fixed interest rates. As a result, you can move away from the variable payments of a HELOC to a fixed monthly payment.

Roll Your HELOC Into Your Mortgage

Another option available is to roll your HELOC into your mortgage using a refinance loan. When you refinance your mortgage—or in this case, your mortgage and HELOC—you take out a new loan to replace your original loan. You’ll have a new interest rate, a new payment term, and new monthly payments.

Depending on your situation, refinancing your mortgage may allow you to lower your payments or interest rate. And you’ll go from two separate monthly payments between your mortgage and HELOC to just one.

But there could also be some potential downsides. First, refinancing your mortgage also requires new closing costs. And depending on how long you plan to stay in the home, you may not be able to recoup those costs with the savings you’ll get on your loan.

Depending on when you last used your HELOC and for what purposes you used the funds, you may not be eligible to roll the proceeds into the new mortgage without it being considered a "cash-out refinance." To avoid this, you may have to pay off the HELOC portion separately before refinancing your primary mortgage. The alternative is that pricing on cash-out refinances is usually more expensive than conventional or jumbo and it comes with different LTV requirements and sometimes credit score requirements. This is a substantial effect and has to be considered well in advance.

If interest rates are higher than when you initially got your mortgage, you could end up with a higher interest rate and/or monthly payment.

Take Out a Personal Loan

A personal loan could be another option to help you refinance your HELOC and manage your HELOC payments. These loans come with some benefits, including the fact that they’re unsecured, meaning you don’t have to use your home as collateral.

But personal loans also have some downsides. First, like a HELOC, your loan could have either a fixed or variable payment. A fixed rate would allow you to lock in your monthly payments, but a variable rate would mean your payments could increase in the future.

Another thing to consider with personal loans is that like other unsecured debts, they tend to have higher interest rates than secured loans. A higher interest rate could also drastically increase your monthly payment.

How to Calculate Your HELOC Payment

Whether you’ve already opened a HELOC or you’re just considering it, it’s important to understand what your monthly payment will be. Having this information will help you to manage your budget and avoid any unwelcome surprises.

First, look at your HELOC agreement to determine your repayment responsibilities during the draw period. As mentioned, some HELOCs either require only a small monthly payment during this time or only require you pay toward the interest.

Remember that even if your HELOC doesn’t require you to pay toward the principal during your draw period, you certainly can. The benefit of these early payments is you’ll reduce the amount you pay in interest and can pay off your HELOC more quickly.

Paying down your HELOC during the draw period is also beneficial in that the line of credit will be available for you to use again if you need it. While it’s not advisable to rack up additional debt simply because it’s available, a HELOC could serve as a safety net in the case of a financial emergency.

Once you enter the repayment period of the HELOC, you’ll start making monthly payments toward both the interest and principal of the loan. Like other loans, your HELOC payments are amortized over the entire repayment term based on the amount you borrowed and your interest rate. With that information, you can use an online loan payment calculator to determine what your monthly payments might be.

Amortization is a way of ensuring that at the end of the term of the loan, you've made progress in paying down the balance. You can have a loan that has a one-year term and amortized over 40 years with a variable rate that resets monthly. It's an amortizing loan, but at the end of the term, your payment can change every month, and you've only made a fraction of the progress of paying down the principal, but you've made the same progress. In contrast, an interest-only loan has no amortization period.

What Interest Rate Do You Pay When the Repayment Period Starts?

The interest rate you’ll pay during your repayment period depends on your HELOC terms. Most often, HELOCs have variable interest rates, meaning your rate during repayment will depend on the current market rate. However, if you have a HELOC with a fixed interest rate, it will be based on the rate in your original loan agreement.

How Often Can the Interest Rate Change on a HELOC?

How often your HELOC interest rate can change depends on your original loan agreement. In many cases, your rate can change as often as monthly based on the current market rates. The good news is there’s usually a cap in place on how much your interest rate can increase during the life of your repayment.

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Article Sources

  1. Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”

  2. Consumer Financial Protection Bureau. “Should I Refinance?

  3. Consumer Financial Protection Bureau. “Differentiating Between Secured and Unsecured Loans,” Page 2.

  4.  Investors Bank. “Calculate a Home Equity Line of Credit Payment.” 

  5. Mountain America Credit Union. “How Often Can the Interest Rate Change on a Home Equity Line of Credit?

  6. Consumer Financial Protection Bureau. “What You Should Know About Home Equity Lines of Credit,” Page 8.