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Home Equity HELOCs

How Does Paying Back a HELOC Work?

Home equity lines of credit—aka 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. Your payment and your interest rate can vary, and, in some cases, you may even need 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.

How does HELOC repayment work?

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 only need to make interest payments during this period, but paying more can help you keep that balance in check.

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

HELOC repayment image that shows how a borrower can make multiple withdrawals during the draw period and then must begin repaying principal & interest during the repayment period.

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 often required to make interest-only 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 make monthly principal and interest payments to your lender—often over a period of 10 to 20 years, but 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. 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. You can explore other options once your draw period ends, which we’ll cover later.

Transition from the draw period to the repayment period

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 send a HELOC reset or maturity notification as you get closer to the end of your draw period. If you haven’t received any communications, contact your lender. Missing a payment could result in late fees, extra interest costs, and damage to your credit.

How do HELOC payments work?

Once you enter the repayment period, your monthly payments 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 because you have less time to repay the loan.

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

When your draw period ends, you can repay your HELOC in four different ways. Consider each option below, and work with your lender to choose the best fit for your finances.

Repayment optionWhen it makes sense
Accept the original repayment termsIf you can afford the principal and interest

If you don’t need to use your HELOC again
Convert to a fixed-rate loanIf you prefer consistent monthly payments

If you can meet credit requirements
Renew the HELOCIf you still need to draw from your HELOC
Make a lump-sum paymentIf you can afford to pay a large amount at once

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. 

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.

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—for example, an inheritance or large tax refund—you can put that toward the HELOC and minimize your principal balance (and the long-term interest you pay). 

Are there fees that will affect the repayment amount?

HELOCs come with fees, both upfront and over time. The upfront ones—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 affect your monthly payments.

Here are a few HELOC fees you should look out for:

FeeWhat it isAverage cost
Origination feeFee to process and open the HELOCUp to $125 or a percentage of the loan
Annual / maintenance feesLender’s charges for keeping the HELOC open$25 – $75
Inactivity feesCharge for not drawing from your HELOC often enoughUp to $49 per month
Early termination / prepayment feesPenalty for paying off your HELOC too soon after closing$500
Conversion feeFee to convert HELOC into a fixed-rate loan$75

When they’re listed in a table, these fees may not seem like much. But a 1% origination fee on a $50,000 HELOC is $500. If your HELOC has a $50 annual fee and you keep it open for 10 years, that’s another $500. Remember, these fees are on top of any accrued interest.

This list of fees isn’t exhaustive, either. 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 might jump, 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. 

You should also talk to your lender about other options you might have, including 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.