How Long Do HELOCs Last? Draw and Repayment Timelines
Understand the complete timeline of a Home Equity Line of Credit (HELOC), including its distinct borrowing and repayment phases.
A Home Equity Line of Credit, commonly known as a HELOC, represents a flexible financial tool allowing homeowners to leverage their accumulated home equity. This form of credit functions as a revolving line of credit, much like a credit card, but it is secured by the borrower’s home. Unlike a traditional mortgage or a home equity loan that provides a lump sum upfront, a HELOC offers access to funds as needed, up to an approved credit limit. This financial product is characterized by distinct operational phases, each with its own set of rules and typical durations, which collectively define the overall lifespan of the credit line.
The HELOC Draw Period
The initial phase of a HELOC is known as the draw period, during which the borrower can access funds from the approved credit line. This period typically spans between 5 and 10 years, though some lenders may offer shorter terms, such as three years, or longer ones, extending up to 15 or 20 years. Throughout the draw period, borrowers have the flexibility to withdraw money as needed, repay it, and then borrow again. The amount of available credit typically replenishes as payments are made, allowing for continuous access to funds up to the established limit.
Payments during this phase are frequently structured as interest-only, meaning the monthly payment covers only the accrued interest on the amount borrowed, not any portion of the principal balance. Some lenders, however, may permit or require payments that include a small amount of principal in addition to interest. Making principal payments during the draw period can help reduce the outstanding balance and potentially lower future interest costs. The interest rate during the draw period is often variable, tied to a benchmark rate, which means monthly payments can fluctuate.
The HELOC Repayment Period
Upon the conclusion of the draw period, a HELOC automatically transitions into its second distinct phase, known as the repayment period. At this juncture, the ability to draw new funds typically ceases. The primary objective of this period is to systematically pay down the outstanding balance that accumulated during the draw phase.
During the repayment period, borrowers are generally required to make monthly payments that include both principal and interest on the remaining balance. This shift from potentially interest-only payments to principal and interest payments can lead to a significant increase in the monthly obligation, often referred to as payment shock. The typical duration for the repayment period ranges from 10 to 20 years, depending on the terms outlined in the original loan agreement. This phase is structured to amortize the outstanding loan amount over the specified term, similar to a traditional mortgage.
Total HELOC Duration and End-of-Term Considerations
The total lifespan of a Home Equity Line of Credit encompasses both its initial draw period and the subsequent repayment period. Combining these two phases, the overall duration of a HELOC commonly ranges from 15 to 30 years. For instance, a HELOC might feature a 10-year draw period followed by a 20-year repayment period, resulting in a total term of 30 years. The specific total duration is a fundamental component of the loan agreement established between the borrower and the lender at the outset.
When the entire HELOC term officially concludes, the outstanding balance must be paid off in full. In many cases, the repayment period is structured so that the loan is fully amortized, meaning the principal and interest payments over the repayment term are designed to bring the balance to zero by the maturity date. However, some HELOC structures may result in a large, single payment due at the very end of the term, known as a balloon payment. This can occur if the repayment schedule during the loan’s life did not fully amortize the principal, leaving a substantial remaining balance. If a balance remains due at the end of the term, the borrower is responsible for fulfilling this obligation, which could involve making the balloon payment or exploring other financial arrangements.