Editorial IndependenciaWe want to help you make more informed decisions. Some clearly marked links on this page may take you to a partner website and may earn us a referral fee. For more information, see How we make money.
You need cash to fix your leaky roof. Or, you want to replace your outdated cabinets with sleek, soft-closing cabinets. Whatever the case may be, HELOCs can give you access to a large revolving line of credit that you can use over and over again over a set period of time, known as the term period. retirement.
But what happens when the HELOC drawing period ends?
Your draw period can be up to 10 years, so getting into the payout, with full interest and principal payments, can be quite a surprise. “It can be a game changer,” says Katie Bossler, a quality assurance specialist at GreenPath Financial Wellness, a national nonprofit financial counseling agency. “It’s like having a credit card that’s no longer available to use,” she adds.
If you don’t have a plan to manage your payments when the withdrawal period ends, you may struggle to cover the cost. And since your house serves as collateral in the HELOC, it could be a risky situation.
To avoid any problems once your payment begins, take the time now to review your HELOC agreement, understand your payment options, and develop a plan to deal with your debt.
How does a HELOC work?
With lower interest rates compared to other forms of credit and payment terms of up to 20 years, HELOCs can be an attractive option for homeowners who have built up equity in their home.
“As a line of credit, you can use it repeatedly and make withdrawals to meet your needs,” says Jon Giles, senior vice president and director of direct consumer lending at TD Bank. “Instead of borrowing everything on day one, you can withdraw funds when you need them,” he explains.
It is this flexibility that makes HELOCs attractive to borrowers, but it also carries its own risks. The fact that you can continually borrow against the line of credit throughout the entire draw period, coupled with the fact that the interest rate can change over time, means you may not know what your monthly payment will be until start the payment. This makes it especially important to plan ahead.
What is a HELOC draw period?
While HELOC terms may vary depending on the bank issuing the line of credit, they all follow this basic structure: You have a withdrawal period, followed by a repayment period.
The draw period is the predetermined length of time you can use your revolving line of credit. During the drawing period, you can withdraw money from your HELOC account to pay for any expenses you may have.
While you are in the withdrawal period, you may only be required to make interest-only payments. Depending on the terms of your loan, the interest rate, and the amount of credit available, your payment during the draw period may be quite low.
Each lender will have their own terms, but the most common length of draw periods is 10 years. “I stress that people talk to their bank,” says Giles. “Different banks have different policies and structures. But generally, HELOCs have a 10-year withdrawal period, followed by a 20-year repayment period,” he says.
What is a HELOC pay period?
Once your withdrawal period ends, your HELOC will go into payment and you will no longer be able to access the line of credit.
During the withdrawal period, you were only required to make payments against interest. Once you enter the HELOC payment period, you’ll need to make fully amortized payments, which means you’ll pay against principal and interest.
After several years of making interest-only payments, the jump to full interest and principal payments can come as a surprise, so be sure to review your loan documents and make a note of when your HELOC will go into payment. “Be prepared to make that full payment when the loan converts to a fully amortized payment schedule,” says Tabitha Mazzara, chief operating officer of Mortgage Bank of California (MBANC).
It’s important to know that you don’t have to wait for the payment period to start making payments. In fact, experts recommend making regular principal payments during the withdrawal period to reduce the burden during the repayment period. That will not only help you lower your monthly payment later on, but also save on interest overall. “I would encourage someone to think of a plan even before their pay period starts, to get [the HELOC] it was worth it,” says Bossler.
HELOC payment terms vary, but can be up to 20 years. “Payment periods are completely dependent on the lender,” says Mazzara. “I’ve seen 20-year lines, 15-year lines, five-year lines. I would say the average is about 15 years,” she says.
Unlike other forms of credit, such as personal loans or home equity loans, most HELOCs have variable interest rates. The rate is based on the prime rate (the benchmark rate that banks charge their most creditworthy customers, which can fluctuate over time) plus the lender’s margin. Because the HELOC has a variable rate, your payment can change from month to month as the interest rate goes up or down.
What to do before your giveaway period ends
If you signed up for a HELOC and your withdrawal period is nearing its end date, here are some things you can do now to make sure your transition to payment goes smoothly:
Contact your bank
As your withdrawal period ends, your bank will send you letters to remind you of the payment terms. “We’re all guilty of not opening every piece of mail, but pay attention to anything that comes from your bank,” suggests Giles.
If there’s a chance you didn’t receive the notice, call or visit your bank in person to review the HELOC terms and get answers to any questions you may have. The bank can tell you when the withdrawal period will end, when your repayment term will begin, and how much your first payment will be.
Check the interest rate
In most cases, HELOCs have variable interest rates. However, there may be an opportunity to transfer it to a fixed interest rate. “Most banks will have a fixed-rate payment option as part of the HELOC, but you may need to set it up before the end of the withdrawal period,” says Giles. “Contact your bank and ask,” she recommends.
If you’re concerned about the variable interest rate on your HELOC, talk to your bank about refinancing your line of credit into a home equity loan. While both HELOCs and home equity loans are secured by your home, a home equity loan typically has a fixed interest rate and a fixed monthly payment, which can be easier to budget for.
A fixed interest rate may be a good idea if you think you’ll need the entire payment period to pay off the HELOC. It will give you predictable monthly payments so you can budget accordingly. However, a variable interest rate may be better for some borrowers. “It may make sense to keep it [the interest rate] variable if you want to pay it off faster as you can take advantage of low rates right now,” says Giles.
Ask about balloon payments
With some HELOCs, paying the required minimum each month will not pay off the line of credit at the end of your payment term. For those HELOCs, the bank may require a balloon payment. Balloon payments are larger lump-sum payments that cover your remaining balance, so you may need to come up with thousands of dollars at a time to eliminate your debt.
If you’re not sure if a balloon payment is required, contact your bank and ask about the terms of your HELOC.
Look up fees and fines
If you want to pay for a HELOC quickly, be aware that there may be additional fees for paying for a HELOC early. While many HELOC lenders do not charge prepayment penalties, there are some that do. Check your HELOC agreement and term disclosure documents for any advance payments or early closing fees.
Update your budget
Beyond the fact that you’ll need to make monthly debt payments, Bossler says there’s another factor people sometimes forget about the repayment period: the fact that you’ll no longer be able to borrow money. Before your HELOC withdrawal period ends, make sure you’re not only adjusting to upcoming monthly payments, but also figuring out how you’ll pay for the things you were previously using HELOC for, he advises. Consider setting up an emergency fund for when you can no longer use the HELOC to cover unexpected expenses, or cut some expenses from your monthly budget to prepare for that drop in cash flow.
Alternative payment options
When the HELOC withdrawal period ends, you will enter the payback period and make payments on the agreed terms. However, you could use the following alternatives to save money or change your payment schedule:
- Make Payments Towards the Principal During the Withdrawal Period: If you can afford to, consider making payments toward principal during your draw period instead of making interest-only payments. By reducing principal sooner, less interest will accrue and you will get out of debt faster.
- Pay more than the minimum required: Paying only the minimum will ensure that you are in debt for the entire HELOC payment term, and you may still have to make a balloon payment at the end of it. To pay off the HELOC quickly, pay more than the required minimum. Even a small additional payment, like $50 per month, can make a significant difference.
- Refinance to a new HELOC: As your withdrawal period ends, you may still need access to a line of credit, or you may need more time before you can make amortized payments. If that’s the case, you could refinance your line of credit into a new HELOC. “Interest rates are advantageous right now,” says Giles. Because of this, you may be able to get similar or better rates than your original HELOC. But consider the pros and cons of taking on new debt. “Think about what you’re trying to do with the monthly payment, how quickly you want to pay it off, and decide if you still need a line of credit,” advises Giles.
- Convert to a fixed interest rate: If you think it will take several years to pay off the HELOC and you want a predictable, fixed monthly payment, talk to your bank to find out if a fixed-rate payment option is available.
- Talk to a credit counselor: If your HELOC payment period is coming up but you’re having trouble paying down debt, consider seeking free or low-cost help from a nonprofit credit counseling service. A credit counselor can review your budget, help you determine an affordable debt payment plan and figure out the best strategy for reaching your financial goals, says Bossler.