Do HELOCs Expire? What Happens at the End of Draw Period

A Home Equity Line of Credit (HELOC) functions as a revolving line of credit, allowing homeowners to borrow against the equity established in their property. While a HELOC does not simply “expire,” it has a defined lifecycle with distinct phases that dictate how funds can be accessed and repaid. Understanding this structure helps manage the obligations and opportunities a HELOC presents.

HELOC Lifecycles

A Home Equity Line of Credit is structured around two primary phases: the draw period and the repayment period. These distinct segments govern how borrowers access funds and their payment responsibilities. Understanding these periods is key to a HELOC’s operational framework.

The initial phase is the draw period, during which the borrower can withdraw funds from the approved credit line. This period functions similarly to a credit card, allowing access up to the credit limit. Borrowers typically make interest-only payments on the outstanding balance, offering flexibility. This draw period commonly spans 5 to 10 years.

Following the draw period, the HELOC transitions into the repayment period. The borrower can no longer draw new funds. Payments during this phase include both principal and accrued interest, structured to repay the outstanding balance. This repayment period typically lasts 10 to 20 years.

Transition at the End of the Draw Period

The conclusion of the draw period marks a shift in a HELOC’s terms, directly impacting financial obligations. The HELOC automatically transitions into its repayment phase, altering monthly payments. This change requires financial planning.

Upon entering the repayment period, interest-only payments cease. Borrowers become responsible for payments covering both principal and accrued interest. This change often results in a higher monthly payment than during the draw period.

To manage this transition, borrowers have several options based on their financial situation and lender offerings. These include refinancing the outstanding HELOC balance into a new HELOC, a home equity loan, or a cash-out refinance of the primary mortgage. Lenders may also offer to convert a variable-rate HELOC balance into a fixed-rate loan for payment predictability. Paying off the entire outstanding balance is another option. Reviewing the original HELOC agreement in advance helps understand specific terms and available options.

Lender Initiated Changes to HELOC Availability

Lenders maintain rights to modify or restrict a HELOC’s availability, even before the scheduled end of its draw period. These actions occur when conditions outlined in the HELOC agreement are met. Such changes can impact a borrower’s access to their credit line.

A lender may reduce the credit limit, suspend new draws, or demand full repayment of the outstanding balance. These measures are triggered by predefined events. For example, a decline in the property’s appraised value can prompt such action.

Negative changes to the borrower’s credit score or financial situation can also lead to a lender freezing or reducing the line. Other conditions include defaulting on HELOC terms, such as missing payments, or breaching other loan agreement covenants. Lenders exercise these rights to protect their investment.

Borrower Initiated HELOC Closure

Borrowers can proactively close their Home Equity Line of Credit at any point, maintaining control over their financial arrangements. This voluntary process typically involves settling the outstanding balance and formally terminating the credit line.

Borrowers typically close a HELOC by paying off the entire outstanding balance. Once the balance is zero, the borrower should contact the lender to formally request account closure. Obtain a payoff statement from the lender to ensure the exact amount due, including any final interest or fees, is remitted.

After the balance is paid and the account is closed, the borrower should confirm the lender releases the lien on their property. This removes the HELOC from the home’s title. While some HELOCs may have early closure fees, many do not. Borrowers should consider future credit needs before closing, as reopening a new HELOC requires a new application and approval.