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Only interest payments are due during a HELOC draw period.
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The first phase of a home equity line of credit, or HELOC, allows you to borrow money over a fixed period of time.
This is called the draw period and it commonly lasts between five and 10 years.
Borrowers are typically responsible for interest-only payments during a HELOC draw period.
If you’re in need of cash to pay for large expenses or an emergency, you can tap into your home’s equity through a home equity line of credit, or HELOC.
While a HELOC is similar to using a credit card, a big difference is that you borrow money for a fixed time, known as the HELOC draw period, rather than indefinitely. Here’s how it works.
What is a HELOC draw period?
The HELOC draw period is generally 10 years, though it can be shorter or longer. During this time, you can access your line of credit using checks or a credit card. The minimum monthly payment during this period is the interest due on the balance you’re carrying.
“During the draw period you can use the funds, pay some back, and then use them again if you choose,” explains Jackie Boies, senior director of partner relations at Money Management International.
Depending on the terms you agreed to with your lender, you may owe the full balance in one lump sum at the end of the draw period, known as a balloon payment. More commonly, you’ll make regularly scheduled payments that include both the mortgage principal and interest over a fixed period of time.
Important: When considering a HELOC, make sure you understand all of the terms and conditions from the onset. Communicate early and frequently with your lender so that you’re on track to make consistent payments and successfully pay off what you’ve borrowed.
How does a HELOC draw period work?
When choosing a HELOC lender, read the fine print. There may be rules around minimum borrowing requirements, like additional fees that apply if you don’t take out at least some of the money, or if you close the line of credit early.
During a HELOC draw period, borrowers typically pay only the interest on their outstanding balance. Once the draw period expires, the repayment period begins, when monthly payments of interest and principal are due until the balance is paid off.
“It’s very important to understand when that door closes on your ability to draw against the amount of the loan,” says Bruce McClary, senior vice president of membership and communications for the National Foundation for Credit Counseling. “You don’t want to find yourself short of the money you need when that draw period closes.”
A HELOC can be great for borrowers who are using the funds to add value to their home through a renovation project. But consumers who are using a HELOC for debt consolidation need to be especially careful, says Katie Bossler, quality assurance specialist with GreenPath, a nonprofit that offers financial counseling services.
Payments will be low during the draw period, Bossler says. “But you still owe that principal balance, and then you’re going to have to face the music when that 10 years ends, and that can be really tough,” she adds.
Note: Most HELOC rates are variable interest rates tied to the prime interest rate, which can change several times a year. This means payments during the draw period and the repayment period can fluctuate.
HELOC draw period example
Wondering what the numbers might look light if you were to take out a home equity line of credit? Here’s an example:
Credit limit: $25,000
Draw period: 10 years
Annual percentage rate (APR): 5%
Say you’re approved for a HELOC in January 2024. For the next 10 years, until January 2034, you’re able to withdraw funds from your $25,000 line of credit as many times as you need.
In year one, you borrow $15,000 for a kitchen remodel. The following month, you’ll start making monthly interest payments on that outstanding amount (5% APR x $15,000 = $62.50). You make these monthly payments for the remainder of the draw period, unless you pay back the principal ($15,000) before the repayment period begins.
Throughout the draw period, you can return to the line of credit — now $10,000 — and withdraw more funds. Each time you increase your outstanding balance, monthly interest payments will go up (unless your rate changes at the same time).
HELOC draw period FAQs
How long is a HELOC draw period?
The HELOC draw period varies by lender, but is often between five and 10 years.
Can I pay off a HELOC during the draw period?
You can pay off a HELOC at any time, but check with your lender about whether additional fees apply to close the line of credit early. Weigh those fees against any annual fees that apply for maintaining the line of credit for the agreed-upon term. When in doubt, ask a financial advisor whether it’s better to close the line of credit or keep it open with no balance.
How many months do you have to be on a HELOC?
The exact timeline depends on the lender, but a HELOC draw period typically lasts between five and 10 years (60 to 120 months). The HELOC repayment period often lasts for 20 years (240 months).
HELOC draw periods: The bottom line
A HELOC can be a useful financial product for funding a home renovation or large, ongoing expenses like medical bills or tuition. To get the most out of a HELOC, experts recommend knowing your financial situation well, borrowing only what you need, and when possible, making extra payments to lower your principal more quickly.
Shop around for the terms and conditions most suitable to your needs, and ensure you communicate with your lender well in advance of the close of the draw period so that you aren’t hit with repayment shock.
