How Long Do You Have to Pay a HELOC?

A Home Equity Line of Credit (HELOC) offers homeowners a flexible way to access the equity built in their property. It functions as a revolving line of credit, similar to a credit card, where your home serves as collateral. This financial tool allows you to borrow funds as needed, up to an approved limit, providing a source of money for various expenses, such as home improvements or debt consolidation. Understanding a HELOC’s duration and payment structures is crucial for financial planning.

The Two Phases of a HELOC

A HELOC is structured around two distinct periods: the draw period and the repayment period. This two-phase design influences the repayment timeline and payment structure. The combined length of these two periods can often extend up to 30 years.

The draw period is the initial phase during which you can access funds from your approved credit line. This period lasts between 5 and 10 years, though some can be as short as three years or as long as 15 years. During this time, you can borrow, repay, and re-borrow money as often as needed, up to your credit limit.

Once the draw period concludes, the HELOC automatically transitions into the repayment period. In this second phase, you can no longer draw new funds from the line of credit. The repayment period is dedicated to paying back the outstanding principal balance, along with accrued interest. This phase often has a longer duration, ranging from 10 to 20 years.

Payments During the Draw Period

During the HELOC’s draw period, borrowers commonly make interest-only payments on the amount they have borrowed. This means that your minimum monthly payment covers only the interest that has accrued on your outstanding balance, without reducing the principal.

Minimum payments are based on the outstanding balance and variable interest rate. For instance, if you have a $20,000 balance at a 9 percent interest rate, your monthly interest payment would be $150. As HELOCs often have variable interest rates, your monthly payment can fluctuate if the rate changes.

While interest-only payments are prevalent, some lenders may offer or require payments that include a portion of the principal even during the draw period. However, if only interest payments are made, the principal balance will not decrease, meaning the full borrowed amount will remain outstanding when the repayment period begins. This can lead to a significant increase in monthly payments later on.

Repaying Principal and Interest

Upon the conclusion of the draw period, a HELOC enters its repayment phase, shifting the payment structure. At this point, your ability to borrow additional funds ceases. The focus then transitions to fully amortizing the outstanding principal balance.

During the repayment period, your monthly payments are calculated to include both principal and interest, to systematically pay off the loan. This is similar to the amortization schedule of a traditional mortgage. The payment amount is determined by the outstanding balance at the end of the draw period and the remaining length of the repayment term.

Variable interest rates continue to influence these amortized payments. An increase in the interest rate will result in a higher monthly payment, while a decrease will lead to a lower one, or a larger portion of the payment going towards principal. This change from interest-only payments to principal and interest can cause monthly payments to increase substantially, sometimes even doubling.

Influencing Your HELOC Payoff Timeline

Borrowers can influence their HELOC payoff timeline and reduce total interest paid. Making extra payments beyond the required minimum can significantly accelerate the payoff. During the draw period, any additional payments applied to the principal balance will reduce the amount subject to interest, lowering future interest costs and the balance transitioning into repayment.

Similarly, during the repayment period, making payments exceeding the scheduled amortized amount can shorten the loan term and save on interest. Confirm with your lender that extra payments apply directly to principal, not merely held as future payments. Even small, consistent overpayments can yield considerable long-term savings.

Another strategy involves refinancing the HELOC. This can mean converting the balance into a new HELOC, restarting draw and repayment periods, or consolidating it into a fixed-rate home equity loan or cash-out refinance. Refinancing offers more predictable payments or a potentially lower fixed interest rate, impacting duration and cost. Paying off the entire outstanding balance in a lump sum immediately concludes the repayment obligation. Check for any prepayment penalties with your lender before pursuing this option.