How Does HELOC Repayment Work?

Home equity lines of credit—also called HELOCs—might sound similar to home equity loans, but they’re quite different, especially in how they’re repaid.

While home equity loans work much like traditional mortgages, with a set payment and term, HELOCs are more inconsistent. Both your payment and your interest rate can vary, and, in some cases, you may even have to pay off your full balance all at once. 

Are you considering using a HELOC to access your home equity? Make sure you understand the fine print.

In this guide:

• Is the repayment process the same the entire time?
• Is the transition from the draw period to repayment sudden or gradual?
• What are the options for repayment after the draw period ends?
• How are payments calculated during the repayment period?
• Are there fees that will impact the repayment amount?
• How to prepare for the repayment period on a HELOC?

Is the repayment process the same the entire time?

HELOCs are unique financial products. Though they typically have lengthy terms (30 years is common), that term is split into a draw period and a repayment period. 

In the draw period—usually 10 years—you can withdraw and repay funds as needed, up to your credit limit. Typically, you’re only required to make interest payments during this period, though paying more can help you keep that balance in check.

Once you enter the repayment period, you’ll start repaying both principal and interest to your lender. Sometimes, HELOCs may require a balloon payment at this time, meaning you’ll need to repay your balance all at once. (These aren’t as common as they once were, though). 

Draw period

The draw period is essentially the time you have to spend the money. If you have a $50,000 HELOC with a 10-year draw period, you could withdraw funds from that $50,000 as many times as necessary during the next decade. You could also withdraw money, repay it, and borrow again. 

This can be helpful if you have ongoing expenses you need to cover or if you’re remodeling your house and are not quite sure how much cash you’ll need over time.

When you’re in the draw period, you’re usually only required to make interest payments. This means your payments will vary based on how much you withdraw. They’ll also vary based on your interest rate. Most HELOCs have variable rates, meaning they can fluctuate over time. 

Repayment period

The repayment period is the part of your loan term dedicated to repaying your balance. It’s when you’ll make monthly principal and interest payments to your lender—usually over a period of 10 to 20 years, though this varies based on your loan and lender.

During this period, payments are not optional, and, just as in your draw period, they can vary, too. This can sometimes make budgeting for the payments more difficult. 

If you’re struggling to make your payments, your lender might allow you to sign a HELOC modification agreement to change the terms.

Your lender can also freeze your HELOC in certain instances, and you can request your lender freeze your line of credit. There are other options you can explore once your draw period ends. We’ll go into these later.

Is the transition from the draw period to the repayment period sudden or gradual?

The transition from the draw period to the repayment period is automatic. So once you’ve finished out month 120 (if you have a 10-year draw period), your HELOC will pivot into the repayment period, and you’ll start repaying your balance. 

Your lender should notify you as you get closer to the end of your draw period. If you haven’t received any communications, reach out directly. Missing a payment could result in late fees, as well as extra interest costs and damage to your credit.

>>Read more: Do you have to pay off a HELOC when refinancing?

What are the options for repayment after the draw period ends?

Accept the original repayment terms

The first option once your draw period ends is to adhere to the original terms of your HELOC. This means making monthly principal and interest payments to your lender—usually for a period of 10 to 20 years. The amount of these payments depends on your balance and your interest rate for the month.

Convert to a fixed-rate loan

You may also be able to convert your HELOC balance into a fixed-rate loan. This would allow you to enjoy a steady interest rate and monthly payment, much like you would with a traditional fixed-rate mortgage. 

Keep in mind that the availability of this option will depend on your lender. You’ll also need to meet the loan’s requirements for debt-to-income ratio, credit score, and more. 

Renew the HELOC

If you still need access to the cash—or just want a financial safety net going into the next decade—some banks will also allow you to renew your HELOC, essentially restarting your draw period over again.

If that’s not an option with your lender, getting a HELOC with another company may be. You could then use that HELOC to pay off your old one’s balance and enjoy access to the remaining credit line moving forward.

Make a lump sum payment

You can also pay off the balance all at once, or if you just got a windfall—like an inheritance or large tax refund — you can put that toward the HELOC and reduce your principal balance (and the long-term interest you pay) significantly. 

How are payments calculated during the repayment period?

Once you enter the repayment period, your monthly payments will depend primarily on two factors: Your interest rate and your balance.

Most HELOCs come with variable interest rates, which means your rate can increase or decrease based on the index it’s tied to. Typically, your rate will change monthly.

For example, if you have a $50,000 balance on your HELOC and a 20-year repayment period, if your interest rate were 5%, you’d pay just under $330 per month. If that rate increased to 5.5%, you’d pay $343 per month. Your payment adjusts according to your rate and remaining balance.

The length of your loan term (how many months are remaining) will also factor in. Generally speaking, the longer your loan term is, the smaller your payments will be. Shorter loan terms have higher payments, as there is less time to repay the loan.

Are there fees that will affect the repayment amount?

HELOCs do come with fees, both upfront and over time. The upfront ones—like the application fee, for example—you’ll pay as part of your closing costs. Others may come up during the draw and repayment periods and could impact your monthly payments.

Here are a few fees you should look out for:

• Annual/maintenance fees: These are the lender’s charges for keeping the HELOC open.
• Transaction fees: These may be charged when you withdraw funds. You might also be charged minimum withdrawal fees if you fail to take out the minimum required amount each year.
• Early termination/prepayment fees: If you pay off your HELOC within a certain period after closing, you may be charged a penalty. 
• Conversion fee: If you opt to convert your HELOC into a fixed-rate loan, there is typically a fee for this.

The exact fees you’ll owe will depend on your lender and loan terms, so make sure to read the fine print. You can find much of this information on your HELOC statement.

How to prepare for the repayment period on a HELOC?

Once you hit your HELOC’s repayment period, your payments will likely jump considerably, so it’s important to prepare. Contact your lender to find out the exact month you’ll enter repayment, and budget for larger monthly payments going forward. 

You should also talk to your lender about other options you might have, like renewing your HELOC or converting it into a fixed-rate loan if that fits your budget and goals better.

Ready to close your HELOC? Start by sending your lender a HELOC close out letter.