What’s the difference between a draw period and a repayment period? This is one of the most common questions lenders get about home equity lines of credit, or HELOCs. And it’s easy to see why—there’s a lot to understand! Let’s go over some of the most common questions.
A home equity line of credit (HELOC) can be an attractive option for homeowners looking to fund home improvements consolidate debt or access cash for other needs. But HELOCs come with repayment terms that are important to understand. In this article, we’ll explain how long you typically have to pay off a HELOC.
What is a HELOC?
A HELOC is a revolving line of credit that allows you to borrow against the equity in your home. It works similarly to a credit card in that you have an approved borrowing limit and can access the funds as needed.
With a HELOC you’ll go through two distinct periods
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Draw period: This is when you can use the line of credit, like when you use a credit card to pay for something. Draw periods usually last 10 years.
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Repayment period: After the draw period ends, any outstanding balance converts to a loan that must be repaid over a set time, usually 20 years. During this period, you can no longer draw additional funds.
HELOC Draw Period Length
The HELOC draw period typically lasts 10 years. This gives you ten years to borrow up to the amount you were approved for.
A 10-year draw period is standard across most lenders, including major banks like:
- Citizens Bank
- Chase
- Bank of America
- Wells Fargo
Some lenders may offer draw periods that are shorter or longer than 10 years:
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Shorter draw periods make it harder to get to your money, but they also lower your interest costs over time. A 5-year draw may be offered.
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Longer draw periods up to 15 or 20 years give you more time to access the line of credit but also increase total interest paid.
How long you can draw on your HELOC will depend on the terms of your loan. If you want to get a HELOC, make sure you ask about the draw length.
HELOC Repayment Period Length
Once the draw period ends, any outstanding HELOC balance will convert to an amortizing installment loan. This loan has set monthly payments of principal and interest and must be repaid over a defined repayment period.
The standard HELOC repayment period is 20 years. So if you have a 10-year draw followed by a 20-year repayment, your total HELOC timeframe is 30 years.
Just like the draw period, lenders have some flexibility with the repayment period length. Common terms include:
- 15-year repayment period
- 20-year repayment period
- 25-year repayment period
A shorter repayment term means higher monthly payments but less interest paid over the life of the loan. A longer repayment term reduces your payments but increases total interest costs.
Consider both the draw period and repayment term length when comparing HELOC offers from different lenders. A lender may offer a lower interest rate but require a shorter repayment period, for example.
Can I Extend the Repayment Period?
In some cases, it may be possible to extend the HELOC repayment period beyond the original term length. Reasons for requesting an extension include:
- You’re struggling to afford the monthly payments.
- You need more time to pay back the full balance.
- An unexpected situation impacted your finances.
To request a repayment extension, contact your lender before the existing repayment period ends. They’ll review factors like:
- Your payment history. Extensions may not be allowed if you have late payments.
- How long you’ve had the loan. Extensions on newer HELOCs are less likely.
- The amount still owed. Lenders may decline if it’s a very large balance.
- Your current financial situation. Can you afford the payments with an extended term?
If approved, the lender will draw up a modified loan agreement with a new, longer repayment schedule. This prevents the loan from defaulting once the original term ends.
Extending repayment often comes with drawbacks like higher interest costs. Work closely with your lender to understand the implications before agreeing to new terms.
Early Repayment Options
While the standard repayment timeframe is 10 years to draw plus 15 to 25 years to repay, you may choose to pay off your HELOC faster in a couple different ways:
Pay more each month: You can choose to pay more than the required minimum monthly payment. Adding extra principal curbs interest growth and shortens the payoff timeline.
Make a lump sum payment: With this option, you make one large payment of $10,000 or more to slash the outstanding balance. The closer you get the balance to zero, the fewer interest costs you’ll incur over time.
Refinance or take out a second mortgage: These options allow you to pay off the HELOC in full immediately using funds from a new loan with better terms.
Paying off the balance early or refinancing can help you:
- Avoid interest costs as rates rise.
- Eliminate the repayment risk once the draw period ends.
- Remove the lien from your home.
Check with your lender about any prepayment penalties before pursuing early repayment. Most HELOCs allow paying ahead without penalty.
The Bottom Line
When getting a home equity line of credit, pay close attention to the length of the draw period and repayment term. The standard terms are 10 years to access the funds followed by 20 years of repayment. But lenders can offer different combinations that impact your costs, flexibility, and payoff timeline.
Understanding the HELOC terms upfront helps ensure it aligns with your needs and financial capabilities both now and in the future. Know your repayment responsibilities before tapping into your home’s equity through this popular financing option.
Q: What is a draw period and how does it work?
A: The draw period for a HELOC works similarly to a credit card — you can borrow up to your approved amount for the duration of the draw period, which is typically 10 years. You’re given a set amount to borrow against, based on the equity you have in your home.
The draw period is the first period of the line of credit which you can typically access by writing a check, transferring funds through online banking or via your mobile banking app. However, these methods may not be available with all lenders and may also be subject to limits. You can withdraw money as often as you’d like, and you’ll only have to pay interest on what you’ve borrowed during the draw period.
Let’s say you take out a HELOC for $25,000, and you need to write a check to your contractor for $5,000. You can still borrow $20,000 at a later date, and you’ll only have to pay interest on the $5,000 you borrowed.
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HELOC Payments Explained | How To Pay Off A HELOC
FAQ
How long does a home equity line of credit last?
The draw period typically lasts up to 10 years. During this time, you’re usually only required to pay interest on what you borrow. At the end of the draw period, you’ll begin repaying what you borrowed plus any outstanding interest. A home equity line of credit (HELOC) is a way to borrow money that lets you use the value of your home as collateral.
Can you pay off a home equity line of credit early?
Making extra principal payments on a home equity line of credit can lower your monthly payments and help you pay off the loan faster. Borrowers often wonder if they can pay off their home equity line of credit (HELOC) early. The short answer? A resounding yes, because doing so has many benefits. But how does paying back a HELOC work?.
What is a draw period on a home equity line of credit?
The draw period is the initial phase of a home equity line of credit (HELOC), during which you can withdraw funds, up to your credit limit. The draw period typically lasts up to 10 years. During this time, you’re usually only required to pay interest on what you borrow.
Can I pay off my HELOC with a home equity loan?
Pay your HELOC off with a home equity loan. However, a home equity loan is not the same as a line of credit. A home equity loan gives you the money all at once, and you start paying it back right away at a fixed interest rate. If you go this route, however, you might increase the amount you pay in interest overall.
How often should you use a home equity line of credit?
Use your line of credit as often as you need during your draw period. How does a home equity line of credit work? A home equity line of credit is like a credit card that uses your equity as collateral, allowing you to borrow money as needed up to your credit limit.
What is the home equity line of credit calculator?
This tool shows either the number of months necessary to repay a home equity line of credit – if the debt is paid off in the desired timeframe entered – or how much debt you will have at the end of the period. In case the interest rate is variable, the calculator allows you to enter a forecast.
How long do I have to pay back a home equity line of credit?
A home equity loan is a lump-sum amount paid to the borrower with a repayment schedule much like a mortgage. Terms may last for 5, 10, 15 or 20 years.
What is the monthly payment on a $50,000 home equity line of credit?
What is the monthly payment on a $100,000 HELOC?
How quickly do you have to pay back a line of credit?
A line of credit is a flexible loan from a financial institution that consists of a defined amount of money that you can access as needed. You can repay what you borrow from a line of credit immediately or over time in regular minimum payments.