How borrowing and repaying works during a HELOC draw period

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A photo of a young couple meeting with a banker to discuss home equity lines of credit.
Only interest payments are due during a HELOC draw period.

  • 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 draw period, rather than indefinitely. Here’s how it works.

What is a HELOC draw period?

The 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 principal and interest over a fixed period of time.

How does a HELOC draw period work?

When choosing a lender for a HELOC, 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.

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 2023. For the next 10 years, until January 2033, 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).

Frequently asked questions

What is a HELOC?

A home equity line of credit, or HELOC, is a revolving credit limit available for a fixed period of time that uses your home as collateral. This type of credit line can help you access money for large expenses like a home renovation or college tuition. Interest rates on a HELOC are usually lower than on a credit card since the amount you’re able to borrow is guaranteed by your house — a big advantage for lenders. 

What’s the difference between a HELOC and a home equity loan?

Unlike a HELOC, which allows you to borrow in a similar way to a credit card, a home equity loan gives you the loan amount up front. And where a HELOC allows for interest-only payments while the credit line is open, every installment on a home equity loan includes interest and payment toward the principal. If you need all of the funds up front and don’t need flexible withdrawals, or want to start paying on the principal right away, a home equity loan may better serve your needs. 

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. 

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.

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