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How Do HELOC Draw Periods Work?

Most HELOCs give you a 10-year draw period in which to borrow money. During this time:

• You can draw as much as you like up to your total available credit line. You don't start making payments until you actually borrow from the credit line.
• You make minimum payments on the amount you borrow—typically only paying interest.
• You may also be able to make payments on the loan principal, depending on your HELOC's terms.
• Some HELOCs let you repay the loan in full during the draw period (although there may be a prepayment penalty for doing so).

As you pay back what you borrow, it becomes available to borrow again. HELOCs can be useful for expenses that are paid in stages or don't have a firm timeline, such as home improvement projects. You can borrow from the HELOC in increments to pay contractors as work is done.

Example: Suppose you get a $100,000 HELOC with a 10-year draw period. You draw $40,000 to remodel your kitchen; three years later, you draw $15,000 for a new roof. You have borrowed $55,000 and have $45,000 available.

When the draw period ends, your HELOC enters the repayment period. At this point, you can no longer borrow money and have to repay the balance of the loan (in this case, $55,000) plus interest.

Some HELOCs have a balloon payment, meaning the entire loan balance is due when the draw period ends. More commonly, a HELOC repayment period lasts 20 years.

Because your payments during the repayment period include both principal and interest, they'll be much higher than your payments during the draw period. Many borrowers find their payments more than double compared with interest-only payments. In addition, most HELOCs have variable interest rates, so your payments may go up or down based on benchmarks such as the prime rate.

Learn more: Best Ways to Use a HELOC

How Long Is a HELOC Draw Period?

Typically, a HELOC draw period lasts five to 10 years and is followed by a 20-year repayment period. However, how long the draw period on a HELOC lasts may vary depending on the lender. For example, some HELOCs offer a 15- or 20-year draw period, which can give you more flexibility in accessing funds.

Learn more: What You Need to Know About HELOCs

Can You Pay Off a HELOC During the Draw Period?

You can typically pay off a HELOC during the draw period. If you do, your loan will be closed with no further payments due. However, some lenders charge a prepayment penalty for paying a HELOC off early. Check the terms and conditions of your HELOC to see if there is a prepayment penalty. If so, you'll need to weigh the interest savings from an early loan payoff against the penalty.

It's a good idea to repay at least some of the loan principal during the draw period. This reduces the total amount you will owe when the HELOC closes. HELOCs use your home as collateral, so if you can't manage the larger loan payments during the repayment period, you could lose your home.

What to Do Before a HELOC Draw Period Ends

The larger loan payments that begin when your HELOC's draw period ends can come as a shock. To avoid an unpleasant surprise, take these steps before your HELOC's draw period is over.

• Know your repayment terms. Confirm the balance you will owe after the HELOC closes, how long your repayment period lasts and what your monthly payments will be.
• Understand variable-rate possibilities. Variable-rate HELOCs generally cap how much the interest rate can rise at one time and over the loan term; make sure you understand the potential for your payments to rise or fall. You may have the option to convert your variable-rate HELOC to a fixed-rate HELOC with predictable monthly payments.
• Try to repay your HELOC early. Making payments toward principal during the draw period will reduce your loan balance (and your payments) when the repayment period starts.
• Adjust your budget. Once you know what your monthly payments will be, go over your budget. You may need to cut spending elsewhere to make your loan payments.
• Look for ways to lower your payments. If you're worried about making your HELOC payments, there are several ways to reduce them—but you'll need to take action before your draw period ends. Depending on your credit score, debt-to-income ratio and other factors, your options may include:
  • Refinance to another HELOC. Use the proceeds to pay off the outstanding loan. This time, start paying down principal during the draw period so you don't get stuck kicking the repayment can down the road.
  • Refinance to a home equity loan. Home equity loans are installment loans with fixed monthly payments, which can be more affordable than variable-rate HELOC payments. You can use the loan proceeds to pay off the HELOC.
  • Do a cash-out mortgage refinance. If mortgage interest rates are lower than your HELOC or your current mortgage, you may want to consider a cash-out refinance. You replace your existing mortgage with a new mortgage for more than your previous balance, get the difference in cash and use it to pay off your HELOC.

Learn more: Home Equity Loan, HELOC, Cash-Out Refinance: How Do They Differ?

Frequently Asked Questions

The Bottom Line

A HELOC can offer the financial cushion you need to handle a major expense or financial emergency, but the decision to borrow against your home's equity shouldn't be made lightly. A HELOC reduces your home equity, which is likely one of your biggest assets—and if you can't make the payments, you could lose your home.

If you decide a HELOC makes sense for you, check your credit report and FICO^® Score^☉ before you apply. You'll generally need a FICO^® Score of at least 680 to qualify for a HELOC. If your credit score needs work, taking some time to improve your credit can save you money by helping you get approved for a loan with better terms.