What are draw and repayment periods for HELOCs* and HELOANs?

Nearly 30% of homeowners are considering tapping into their home equity, a notable increase compared to a few years ago. If you’re among the three in 10 Americans hoping to access cash through a home equity line of credit (HELOC) or a home equity loan (HELOAN), it’s crucial to understand their differences so you can avoid any surprises when it’s time for repayment. Keep reading to explore how to retrieve funds from HELOCs and HELOANs and how to pay them back.

A HELOC is a revolving line of credit that works similarly to a credit card, using the amount of equity you’ve invested in your home (through your mortgage payments and down payment). They’re useful in cases where you don’t need to access all your funds at once.

For HELOCs, you only need to pay interest on the amount you’ve used. Interest rates are usually variable, meaning they fluctuate depending on the market. They usually have a lower starting rate and provide flexibility with the draw process and payments.

However, there’s also a fixed-rate HELOC option offering protection against rate increases. Typically, fixed-rate HELOCs come with higher rates and reduced flexibility.

You won’t be able to borrow all of your home equity; for primary residences, you may typically borrow up to 95 percent. The exact percentage will vary based on all your debts, your creditworthiness and more.

Draw period

A draw period is the length of time you’re able to use the funds as needed. Typically, draw periods for HELOCs are between five to 10 years, but may vary slightly depending on your lender and specific program. These funds are accessed via checks, online transfers or debit cards.

During this time, you:

• Can access funds up to your approved credit limit
• May borrow more as needed
• Only pay interest
• Have the option to also pay off your principal amount

Repayment period

Once those five to 10 years are over, the repayment period begins, typically lasting 20 years. During this time, you’ll repay both the outstanding balance and interest, which may vary from month to month. Generally, your loan agreement has details on how much your interest rate can change.

You may find that your monthly payments significantly increase if you were only paying interest during the draw period. Be prepared and proactive with your payments so you can enter the formal repayment period feeling empowered and informed. Also, be sure to ask your lender beforehand about any additional fees when the repayment period starts or if you pay your balance off early.

HELOANs are loans based off the equity in your home, providing you with all your funds right away. They function as second mortgages, meaning your primary mortgage doesn’t change.

In contrast to HELOANS, they usually come with fixed interest rates. However, like HELOCs, you typically can’t borrow all of your home’s equity up to 90% of your home’s value.

Draw period

There isn’t a formal draw period for HELOANs because all the money is available upon loan closing as a lump sum withdrawal. This means you’ll be able to use the entire amount as soon as you’re approved, minus any closing costs. You won’t be able to withdraw additional funds.

Repayment period

Because you get all your funds immediately, you’ll start making payments that include interest and the outstanding balance as soon as the next month. You’ll continue providing monthly payments until the loan is paid off. In contrast to HELOCs, you can expect to pay about the same every month because HELOANs have fixed interest rates. In most cases, HELOANs can be paid off early without penalties.