If you are a homeowner and need to borrow a large amount of cash, you may be able to tap into the home equity you have built by taking out a home equity line of credit (HELOC). This form of revolving credit makes it possible to borrow cash to pay for college, a wedding, a remodel, or virtually any other expense by allowing you to borrow up to 80% of the equity you have in your home.
When you take out a HELOC, you have a “draw period,” which is the specific time period you are able to access your available credit. During this time, you can make a withdrawal anytime you wish. Learn more about how to use a HELOC when you need funds to cover expenses.
- A home equity line of credit makes it possible to borrow cash from the equity you build in your home.
- All HELOCs come with a “draw period,” during which you are allowed to make withdrawals from your line of credit.
- Once the draw period ends, you will need to make both principal and interest payments on the funds you borrowed.
How Does a HELOC Draw Period Work?
The draw period of a HELOC, which is typically 10 years, is the period when you are allowed to withdraw cash from your home equity line of credit. You can withdraw up to your available credit line until your draw period is over. During this time, you will likely be required to make monthly interest payments to your lender.
Once your draw period ends, you’ll enter the repayment period. For the next 10-20 years, depending on your loan terms, you will be required to start paying down both the interest and the principal on the amount you owe.
Unlike a personal loan, you only pay interest on the amount you actually withdraw from your HELOC, not the total borrowing amount available to you. Some lenders will allow you to repay the loan early to help save on interest, but they may charge you a fee to do so.
How much equity you own in the home already, what your current income and debts look like, and how likely a lender believes you are to repay your HELOC will determine how high your credit limit is. Usually, the credit limit is capped by a certain percentage of the home’s appraised value, such as 75%.
How To Withdraw Money During the Draw Period
When it comes time to withdraw funds from your HELOC, you should have a few options. Typically, you can withdraw money from a HELOC using the following methods:
- Credit card
- Cash withdrawal from bank branch
- Online account transfer
- Account transfer request by phone
Some lenders will require you withdraw a minimum amount of cash upfront when you take out the HELOC, but others will not. Once you max out the credit line, you can no longer make withdrawals.
What Happens When the HELOC Draw Period Ends?
Once the draw period ends, you will begin to make payments on both the loan principal and interest. Usually, the repayment term is 10 years or more. You can also choose to refinance to a new mortgage loan or to a home equity loan instead. A cash-out mortgage refinance is also an option, but with whichever path you choose, you will need to make loan payments until you pay off your loan.
If at all possible, it can be helpful to pay back some of the principal during the draw period. Doing so will help you pay less interest once the HELOC closes.
As you get closer to the end of your draw period, confirm what your balance will be once the HELOC closes, what your repayment terms are, how much you will owe in interest, and what you will need to pay back on a monthly basis.
Many HELOCs have variable interest rates, which means that interest payments can change over the course of your repayment period. It can be helpful to budget for the highest possible payment amount (which does cap out at a certain point).
Frequently Asked Questions (FAQs)
How can I find out when my HELOC draw period ends?
Your HELOC lender will let you know when your HELOC draw period ends. Usually, this draw period is a fixed amount of time and can be as long as 10 years. That said, all lenders have different requirements.
How much does my payment go up after the draw period?
You will usually need to make minimum payments on the interest borrowed during the HELOC draw period. Once the period ends, you’ll start to make both principal and interest payments each month. The amount of your monthly payment will depend on how much you borrowed, the length of your repayment period, and your interest rate. If you have a variable rate, your monthly payments can go up and down as the interest rate changes.
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