Understanding HELOC Draw and Repayment Periods

Home equity lines of credit (HELOCs) may seem confusing at first. They have terms and conditions that are different from other types of loans – and they also function differently.

If you are considering applying for a HELOC for a home remodeling project, to purchase new appliances, or for something else, the following overview can help you understand how the draw and repayment periods work so you can make a smart borrowing decision.

What Is a HELOC Draw Period?

The draw period is when a HELOC is active and you can borrow money from it. It will vary depending on the lender and other factors, but between 5 and 10 years is common.

During the draw period, you can borrow from your HELOC as often as you like. Your credit limit is determined based on the amount of equity you have in your home. Similar to a credit card, you can replenish your available credit by repaying the money you borrowed.

Unlike conventional loans that have fixed interest rates, HELOCs have variable interest rates during the draw period. The rate is variable because you can borrow money repeatedly and the rate must be current each time money is borrowed. It wouldn’t make sense, for example, to borrow money from a HELOC five years after it was opened with interest rates that existed five years ago.

An important way that HELOCs differ from other types of loans is that you have the option of making interest-only payments during the draw period. This feature can come in handy when money is tight. Some businesses, for example, use HELOCs to help bridge the gap during slow seasons and then repay the money they borrowed when business picks up again.

When the draw period ends, you can no longer borrow money from your HELOC. It is now closed and the repayment period begins. If you need to borrow again, you can always apply for another HELOC. 

What Is a HELOC Repayment Period?

One of two things will happen when your HELOC draw period ends. Either a balloon payment will be required or it will enter a repayment period.

With some HELOCs, a balloon payment will immediately be required for the full amount that is due plus interest when the draw period ends. If you aren't able to make a balloon payment, you may be able to refinance the amount due into a personal loan, a home equity loan, or another type of loan.

With some lenders, HELOCs automatically transition into a repayment period after the draw period ends. The balance due automatically converts to a repayment schedule where you will make fixed monthly payments to repay both the principal and interest. HELOC repayment periods vary depending on the lender.

What to Know Before Your HELOC Draw Period Ends

There are a few important things to consider before your HELOC draw period ends to make sure you don’t experience any unpleasant surprises. Being prepared will help to ensure that the transition is smooth and uneventful.

Know When the Draw Period Ends

Be sure to keep up with the specific date that your draw period ends. Write it down on your calendar several months in advance so you can prepare for it. Most lenders start notifying borrowers six months before the draw period ends so you’ll have plenty of time to prepare.

Find Out If Your HELOC Requires a Balloon Payment

It’s important to know whether a balloon payment will be required so you can make sure you have the available funds to cover it. You can also contact your lender to discuss the possibility of refinancing the balance.

Understand How Much You’ll Owe

Knowing exactly how much you will owe with interest when your draw period ends can help you prepare for the future. You can either start saving money to pay it off or make room in your budget for the monthly payments.

Understand the Terms of the Repayment Period

If your HELOC automatically converts into a repayment period when the draw period ends, be sure you understand the terms. It’s important to know how long the repayment period will last and the amount of your monthly payments.

Look for Fees and Penalties

If you enter a repayment period when the draw period ends, find out if there are any fees or penalties for early repayment. You may decide to repay the balance early to help you qualify for another loan or so you will have one less bill to pay each month. The HELOC agreement and term disclosure will have information on any applicable fees and penalties.

Be Mindful of Your Budget

The end of your HELOC’s draw period means that you will no longer be able to borrow money from it. Because of this, it’s important to consider your budget to make sure you can handle the financial change without any problems. If you still need a source to borrow from and you have repaid the money you borrowed, consider applying for another HELOC.

HELOCs with Members Heritage Credit Union

HELOCs are popular with homeowners who want to tap into the equity in their homes. If you are looking for a flexible financing option to pay for the things you need, Members Heritage Credit Union offers a HELOC with competitive rates, no prepayment penalty, and no application or processing fees.

With our HELOC, you may be able to borrow up to 100% of your loan-to-value ratio. You also don’t have to worry about a balloon payment. When the seven-year draw period ends, a repayment period of 15 years begins.

Applying for our HELOC is easy. You can do it in person at one of our branches or you can apply online. If you have any questions, one of our representatives is just a phone call away.

Check out the following link to learn more about our HELOCs and to see how easy it is to apply.

Home Equity Lines of Credit