How Long Does a HELOC Stay Open?

A Home Equity Line of Credit (HELOC) provides homeowners with a revolving line of credit, similar to a credit card, allowing them to borrow against their home equity. This financial tool uses the home as collateral, often resulting in lower interest rates compared to unsecured loans. Understanding how a HELOC operates over time, particularly its distinct phases, helps borrowers manage their financial obligations effectively.

The HELOC Lifecycle: Draw and Repayment Periods

A HELOC’s operational lifespan is divided into two primary phases: the draw period and the repayment period. During the initial draw period, borrowers can access funds as needed, up to an approved credit limit, and typically only make interest payments on the amount borrowed. This period commonly spans 5 to 10 years, though durations can range from 3 to 15 years. While interest-only payments are often allowed, borrowers can choose to pay down principal during this time, which can reduce the outstanding balance and future interest costs.

Once the draw period concludes, the HELOC transitions into the repayment period, and the ability to borrow new funds ceases. During this phase, borrowers are required to make payments that include both principal and interest on the outstanding balance. The repayment period typically lasts between 10 to 20 years, with the combined draw and repayment periods often totaling up to 30 years. This shift usually results in significantly higher monthly payments as payments now include principal.

Navigating the Repayment Phase

The transition from the draw period to the repayment phase can lead to a substantial increase in monthly payments, primarily because payments convert from interest-only to principal and interest. The exact amount of this payment increase depends on the outstanding principal balance, the current interest rate, and the length of the new repayment term. Planning for this change is important, as payments can be considerably higher.

HELOCs typically feature variable interest rates, often tied to an index like the U.S. Prime Rate. These rate changes can affect monthly payments in both the draw and repayment periods, introducing an element of unpredictability. To manage the debt during the repayment phase, borrowers might consider strategies such as making additional principal payments during the draw period to reduce the final balance. Another option involves exploring refinancing the remaining HELOC balance into a fixed-rate home equity loan, which can provide predictable monthly payments, or a cash-out refinance that combines the HELOC with the primary mortgage.

Closing a HELOC Account

Borrowers may choose to close a HELOC account for various reasons, such as having paid off the balance, no longer needing access to the line of credit, or wanting to remove the lien on their property. The process typically involves notifying the lender in writing that you wish to close the account. If there is an outstanding balance, it must be paid in full before the account can be officially closed and the lien released.

Lenders may impose certain fees when closing a HELOC, particularly if it’s closed within a specified timeframe, often within the first two to five years. These early closure fees can range from a flat fee ($200-$500) or a percentage of the original credit limit (up to 1% or more). Additionally, some lenders might require repayment of any lender-paid closing costs if the HELOC is closed prematurely.

Closing a HELOC can have implications for a credit score. It may reduce the total available credit, which could potentially impact credit utilization ratios, especially if other revolving credit lines are limited. It can also affect the average age of accounts, particularly if the HELOC was an older credit line. However, the impact is often minimal if the borrower has a strong credit history with other active accounts.