HELOC draw period: How it works and what to know

A HELOC draw period is the flexible first stage of your home equity line of credit (HELOC). During the draw period, you can borrow, repay, and borrow again up to your approved credit limit, as often as you like. The draw period typically lasts five to 10 years, depending on your lender. 

The second stage of a HELOC is the repayment period. During repayment, you can’t borrow more, and you pay back the principal and interest.

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, which is 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, minimum payments during this phase could 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. 

The Achieve Loans HELOC requires principal-plus-interest payments when you have a balance. No matter what type of payments your HELOC requires, you can pay down or pay off a HELOC during the draw period. Paying down principal early, even when it’s not required, reduces your balance and the interest you'll pay over time. 

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, repay, and borrow more later during the draw period, which could be helpful for expenses that come in waves.

• Cover emergency costs. Some homeowners use a HELOC to cover unexpected expenses that exceed their emergency fund.

How long is a HELOC draw period?

HELOC draw periods are commonly five to 10 years. From start to finish (the draw period plus the repayment period), HELOC loan terms often last 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. Instead, you now focus on paying down your balance. The repayment period typically lasts 10 to 20 years.

If you made 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. The change in your minimum payment amount can be a huge jump, which is why this is 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. The Achieve Loans HELOC works that way: Principal plus interest is required during the draw period whenever you carry a balance.

How HELOC payments could change after the draw period

For a typical variable-rate HELOC with interest-only payments, the payment change after the draw period can be significant. Here's an example of what the change 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 of 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.

• Consider a fixed-rate HELOC for more predictable payments than a variable-rate HELOC.

In limited situations, some lenders may allow changes to your HELOC terms, such as extending the draw period or modifying the loan. Alternatively, some people take out a new loan, such as a cash-out refinance or new HELOC, at the end of the draw period. Any of these options could involve new costs.

The key to managing HELOCs well is understanding how things might change when the draw period ends, and being ready for repayment. You have time, and you have options.