What Is a HELOC Draw Period and How Does It Work?

A Home Equity Line of Credit (HELOC) offers homeowners a flexible way to access the equity built in their property. This financial tool functions much like a revolving line of credit, similar to a credit card, but it is secured by your home. Understanding how a HELOC operates is important for effective use, especially recognizing that it works in distinct phases. One of these phases is the “draw period,” which dictates how and when you can access funds from your approved credit limit.

The HELOC Draw Period Explained

The HELOC draw period represents the initial phase of a home equity line of credit, during which a borrower can access funds from their established credit limit. This period allows borrowing money as needed for various expenses. The typical duration for a HELOC draw period ranges from five to ten years, though some can be shorter, around three years, or extend up to fifteen years, depending on the lender’s terms.

During this draw period, the HELOC operates as a revolving line of credit. Funds can be borrowed, repaid, and then re-borrowed multiple times, as long as the total outstanding balance does not exceed the approved credit limit. As payments are made on the outstanding balance, the available credit replenishes.

The payment structure during the draw period is a feature of HELOCs. Borrowers are required to make minimum monthly payments, which are frequently interest-only payments on the amount borrowed. This means the principal balance is not necessarily reduced unless additional payments are made beyond the minimum interest amount.

Interest accrues on the outstanding balance, and most HELOCs come with a variable interest rate, meaning the rate can fluctuate over time. This variable rate is usually tied to an external financial index, such as the U.S. Prime Rate, and can change monthly, impacting the interest-only payment. Some lenders may offer options to convert a portion or all of the variable-rate balance to a fixed rate, which can provide more payment predictability.

How to Access Funds During the Draw Period

Accessing funds from a HELOC during the draw period involves several methods provided by lenders:

• Specialized HELOC checks function similarly to personal checks linked directly to your line of credit, allowing you to write against your available credit limit for various expenditures.
• Many lenders provide a debit or credit card specifically linked to the HELOC, which can be used for purchases or to obtain cash advances, much like a standard bank card.
• Online transfers allow you to move money directly from your HELOC to a linked checking or savings account through the lender’s online banking portal or mobile application.
• Visiting a bank branch is also an option to request a draw from the HELOC for in-person transactions.

Understanding the Shift to Repayment

Once the HELOC draw period concludes, the account enters the repayment period. At this point, the ability to borrow new funds ceases entirely.

The outstanding balance from the draw period must now be systematically paid back. The repayment period spans a longer term, often ranging from 10 to 20 years. During this phase, payments become higher than those made during the draw period.

This increase in payment is because repayments now include both principal and interest, rather than just interest-only amounts. The loan is amortized, meaning payments are structured to gradually reduce the principal balance over the remaining term until the loan is fully paid off. The variable interest rate, if applicable, will continue to apply to the outstanding balance, meaning payment amounts can still fluctuate based on market rate changes.

Understanding the entire loan term, which combines both the draw and repayment phases, is important from the outset of obtaining a HELOC. The total term, including both periods, can extend up to 30 years. Borrowers should plan for the increased financial obligation that arises when the repayment phase begins to avoid any unexpected payment shock.