Do Home Equity Lines of Credit Expire?

A Home Equity Line of Credit (HELOC) functions as a revolving credit line, allowing homeowners to borrow money using their home’s equity as collateral. This financial product provides access to funds that can be drawn as needed, similar to a credit card, but is secured by the property itself. Homeowners typically utilize a HELOC for various purposes, such as home renovations, educational expenses, or consolidating higher-interest debt. The amount available to borrow is generally determined by the difference between the home’s market value and the outstanding mortgage balance.

Understanding HELOC Lifecycles

Home Equity Lines of Credit do not “expire” in the conventional sense, but rather transition through distinct phases. A HELOC consists of two periods: the draw period and the repayment period. During the draw period, which commonly lasts for ten years, borrowers can access funds up to their approved credit limit and typically only pay interest on the amount borrowed.

This draw period offers flexibility, allowing homeowners to borrow, repay, and re-borrow funds as needed. While a ten-year draw period is common, some HELOCs may feature shorter durations, such as three or five years, or longer ones extending up to fifteen years.

Once the draw period concludes, the HELOC transitions into the repayment period. At this point, the ability to draw new funds ceases. The repayment period typically spans twenty years, though it can range from ten to thirty years depending on the loan terms.

During the repayment period, borrowers make monthly payments of both principal and interest on the outstanding balance. This ensures the entire borrowed amount, plus accrued interest, is paid off by the end of the loan term. Understanding these two phases is essential for managing a HELOC effectively.

What Happens When a HELOC Matures

When a Home Equity Line of Credit transitions from its draw period to the repayment period, changes occur. The most immediate consequence is that the ability to draw new funds ceases. Borrowers can no longer access the remaining available credit, even if they have not utilized their full approved limit.

A key concern is “payment shock.” During the draw period, many HELOCs permit interest-only payments, keeping payments low. However, once the repayment period begins, payments typically increase substantially because they now include both principal and interest repayment.

This shift can lead to a sudden rise in monthly payments, sometimes doubling or even tripling previous payments, impacting a homeowner’s budget and cash flow. The variable interest rate common to most HELOCs can amplify this increase if market rates have risen over the draw period. In some cases, a HELOC might even require a large lump-sum “balloon payment” of the outstanding balance, which can be challenging without planning.

Options for Borrowers

Homeowners have several strategies to manage the HELOC repayment phase. One common approach is refinancing the HELOC, which involves applying for a new HELOC to pay off the existing balance. This can reset the draw period, providing renewed access to funds and potentially more favorable terms, assuming the homeowner meets credit and equity requirements.

Another option is to convert the outstanding HELOC balance into a fixed-rate home equity loan. Lenders may offer this feature, allowing borrowers to lock in a predictable monthly payment that includes both principal and interest, eliminating variable rate uncertainty. This provides stability and can make budgeting straightforward.

Alternatively, borrowers can focus on paying off the outstanding balance. This involves making accelerated payments during the draw period, paying more than the minimum required, or using a lump sum from savings to reduce or eliminate the debt. Prioritizing repayment can reduce total interest paid, though checking for prepayment penalties is advisable.

Selling the home is also an option. When a home with an outstanding HELOC is sold, the balance owed on the HELOC is typically paid off from the sale proceeds at closing, similar to a primary mortgage. This clears the lien before title transfer.