What Is the Draw Period on a HELOC?
Demystify the initial borrowing experience with a HELOC. Understand its flexible structure and how it transitions to repayment.
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, but is secured by the borrower’s home. This security often allows HELOCs to have lower interest rates compared to unsecured loan options. Borrowers can draw funds as needed up to an approved limit, providing financial adaptability for various expenses.
Understanding the HELOC Draw Period
The “draw period” marks the initial phase of a HELOC, during which the borrower has the ability to access funds. This period operates much like a credit card account; you can borrow, repay, and re-borrow funds within your established credit limit. Typical durations for the draw period range from five to ten years, though some lenders may offer shorter or longer terms.
During this phase, borrowers generally make payments that cover only the accrued interest on the outstanding balance. While principal payments are usually optional, making them can reduce the overall balance and associated interest charges. Funds can be accessed through checks, a dedicated debit card, or electronic transfers to a linked bank account.
Utilizing Funds During the Draw Period
The revolving nature of a HELOC during its draw period means that as principal is repaid, the available credit limit replenishes. This allows borrowers to reuse the line of credit without needing to reapply.
Payments made during this period primarily cover interest, which is typically calculated based on a variable interest rate. This variable rate is commonly tied to a financial index, such as the U.S. Prime Rate, plus a set margin determined by the lender. Consequently, the monthly interest payment can fluctuate with changes in the underlying index. While interest-only payments are common, borrowers can choose to make additional principal payments to reduce their outstanding balance and the total interest paid over time.
Transition to the Repayment Period
Once the defined draw period concludes, a HELOC automatically transitions into its repayment period. At this point, the ability to draw new funds ceases. The focus shifts entirely to paying back the outstanding balance that was accumulated during the draw period.
The payment structure changes significantly in the repayment phase. Instead of interest-only payments, borrowers are typically required to make fully amortizing payments that include both principal and interest. These payments are designed to pay off the entire outstanding balance over a new, set term, which often ranges from 10 to 20 years. As a result, the monthly payments during the repayment period are usually higher than those made during the preceding draw period.