What is a HELOC draw period?

A home equity line of credit isn’t quite like most loans—a HELOC has two distinct phases. 

The first part is the draw period, when the HELOC works a bit like a credit card does. During this phase, you can borrow an amount up to your approved credit limit, repay it, and borrow again. The draw period typically lasts five to 10 years, depending on your lender. 

When this phase ends, the repayment period begins. During repayment, you can’t borrow more, and you pay back the principal and interest.

Here’s how the draw period works.

How the HELOC draw period works

During the HELOC draw period, you have a revolving line of credit that’s secured by your home equity (that’s the difference between your home’s market value and how much you owe on the mortgage). You can borrow, repay, and borrow again—a lot like how a credit card works.

Interest accrues only on the amount you actually borrow. Depending on your lender, your payments during this phase may cover interest only, or both principal and interest. If you make interest-only payments, the balance doesn’t go down. You could make interest-only payments for years, and still owe the same amount. Achieve Loans  HELOC requires principal-plus-interest payments when you have a balance.

Here are a few ways homeowners typically use funds they borrow in the draw period:

• Consolidate high-interest debt. You could consolidate multiple debts, giving yourself just the HELOC payment to keep track of.

• Fund home renovations. With a HELOC, you can borrow in phases.

• Covering emergency costs. If you don’t have an emergency fund, a HELOC could be a way to access emergency money quickly.

How long is a HELOC draw period?

HELOC draw periods are commonly five to 10 years. The overall HELOC term (draw period plus repayment period) often spans 20 or 30 years. Check out your potential lender’s terms for an exact idea of what to expect.

What happens when the HELOC draw period ends?

When the HELOC draw period ends, borrowing stops and the repayment period begins. At that point, you can no longer draw from the line of credit.

If you were making interest-only payments during the draw period, your monthly payment will increase. That's because you repay principal and interest over the rest of the loan term, which may last 10-20 years. This shift can be large, so it’s sometimes called “payment shock.”

If your HELOC requires payment of principal plus interest from day one, you shouldn’t experience the same kind of payment spike. 

How HELOC payments could change after the draw period

For a typical variable-rate HELOC, the payment change after the draw period can be significant. Here's an example of what the shift could look like:

The earlier you estimate what your repayment-period payments might look like, the more time you have to plan. Consider these moves to help minimize payment changes:

• As soon as you can, estimate what your balance will be when you start the repayment period, so you can get a good idea what your future payments will look like.

• Even if your lender doesn’t require it, make payments to principal during the draw period to get your balance where you’d like it to be when repayment starts.

• Go with a lender that offers a fixed-rate HELOC. This makes your payments more predictable.

If your financial circumstances make repayment difficult, it’s worth noting that it’s sometimes possible to negotiate with your lender to extend your draw period or modify other HELOC terms. Some people take out a new loan, cash-out refinance, or new HELOC at the end of the draw period, though that involves new costs.

The key to handling HELOCs well is understanding how things may change when the draw period ends, and being ready for repayment. And if you want to minimize the financial challenges that can bring, you’ve got good options.