The home equity line of credit or HELOC repayment period is a unique amortization schedule that is different than most mortgage loans. The HELOC draw period typically ranges from 10 years and a HELOC repayment period of up to 20 years.
A HELOC line of credit enables a borrower to access the equity in your home and utilize the funds for various purposes according to your preference. Many homeowners utilize HELOC loans to get cash for multiple reasons, like refinancing high-interest credit card debt, funding home renovation projects or save for to pay for emergencies.
Inflation has been hot and rising for most of the last three years.
The cost of borrowing is the highest it has been in decades, too.
Fortunately, homeowners often have the ability tap their home equity to borrow money affordably.
Interest rates on credit cards, personal loans and first mortgages are still high, but a home equity line of credit can still be obtained for a reasonable rate 8% or 9% for well-qualified borrowers.
Borrowing money affordably with a home equity line of credit in 2024 is ideal for many homeowners. Millions of families have seen major increases in home value and home equity in the past five years. There have been multiple reports that HELOC credit requirements have been eased because borrowers have more equity and lending becomes less risky.
Today, the typical American homeowner has $200,000 or more in equity in their homes. This means that many homeowners have the ability to tap some of their equity at a low interest rate for whatever they need – home renovations, paying off medical bills, or consolidating debt.
Mortgage lenders usually allow homeowners to borrow 80% or 85% of their home’s value. With $300,000 in equity, you could potentially borrow $100,000 or $200,000, depending on what is owed on the first mortgage.
If you are ready to tap your equity, it’s important to understand what the HELOC repayment process is. If you have questions about HELOCs or want to apply, RefiGuide has you covered!
HELOC Repayment Process Overview
When the lender approves your home equity line of credit, you receive a revolving line of credit. This means you can borrow and re-borrow, so when you pay off the credit line, you can reuse it. The credit line is set to a maximum amount, like a credit card, which is secured by your home’s equity.
During the five or 10-year draw period, you can borrow up to your maximum credit line. But you only need to pay for the money you take out of the credit line, not the entire thing. Usually, the HELOC monthly payment is interest-only during the draw period. You don’t have to pay down the principal that is borrowed during that period, in most cases.
So, your payment will be lower initially because you don’t pay down principal. You also may have a teaser rate on the loan for the first few months or year that will eventually be reset to market rates. Therefore, the rate for a HELOC can rise or fall based on market conditions.
After the draw period ends, you enter the HELOC repayment period, which may be 10 or 20 years. During this time, you cannot borrow any more money on your home equity line of credit. You also have to pay both interest and principal. Your monthly payment will rise significantly. During the repayment period, the HELOC is a fully amortized loan that pays down principal.
Beginning to repay the HELOC can be a startling moment if you are not properly prepared. Your payment will be quite a bit higher, so you should understand when applying for the loan that you will eventually need to pay interest and principal. This is critical because if you cannot afford the loan at some point, you could lose your home during the foreclosure process.
Following the draw period’s conclusion, the HELOC transitions to the repayment phase. During this stage, borrowing against the line of credit ceases, and repayment of the borrowed funds begins. Monthly payments, covering both principal and interest, are made over a predetermined term, often spanning up to 20 years.
Throughout the draw period, which commonly spans from five to 10 years, you have the flexibility to withdraw funds from the credit line, up to your predetermined credit limit. For instance, if you have a HELOC credit line amount $100,000, you might borrow $20,000 in one year of the draw period, $30,000 the following year, and then cease drawing from the HELOC altogether. During the draw period, you’ll be responsible for making monthly payments covering the interest on the borrowed amount.
Once the draw period concludes, your line of credit is closed, and further withdrawals from the HELOC are not permitted. For example, if you you only used $50,000 of your HELOC then you will have a HELOC repayment of $50,000 that will be amortized like a typical installment loan when the draw period ends. Typically, you are given 20 years for the HELOC repayment period to recover the outstanding loan balance.
FAQ
How long do you have to repay a HELOC?
HELOCs begin with a draw period, usually lasting between 120-180 months. When the draw period is finished, the repayment period begins and lasts between 10 to 20 years. It’s important to ask your lender about how long the repayment terms so you fully understand your financial obligations and can plan your budget accordingly.
Can you repay a HELOC during the draw period?
Yes, you can repay a HELOC during the draw period, but you could be charged a prepayment penalty or an early termination fee. Before signing the closing documents, make sure there are no penalties for paying off a HELOC. You can always pay more than the interest only payment and anything above the minimum payment will go towards the HELOC debt.
Does Your HELOC Have a Balloon Payment Due?
However, certain HELOCs necessitate a balloon payment comprising the entire balance plus accrued interest at the conclusion of the draw period. It is not uncommon for lenders to have a HELOC balloon payment written into the agreement. Make sure you are aware of your HELOC terms before you close your home equity line of credit with the bank or HELOC lender.
Is the Repayment Period Fixed?
The repayment period for a home equity line of credit can differ based on the type of HELOC and the original lending terms. The HELOC agreement outlines the repayment schedule and interest rate. It wasn’t until recently when lenders began offering a fixed rate conversion for the HELOC repayment period.
Why Should You Get a HELOC Today?
Taking out a HELOC can be a smart financial choice if you understand the HELOC repayment process and the potential risks. There are many reasons that millions of homeowners are taking out HELOCs in 2024:
Today’s HELOC loan rates are elevated, but only in comparison to other borrowing methods. Many HELOCs come with an 8% or 9% interest rate, which is inexpensive money when you realize that many credit cards have a 20% or higher interest rate. Many personal loans are around 12%. You can save significant money by getting a home equity line of credit to fix up your home, pay off debt, or send a child to college.
Second, real estate values and equity are much higher than a few years ago. Many homeowners have $200,000 or more in equity, so there is ample opportunity to borrow the money you need.
Third, interest rates are still elevated, but once inflation is tamed, the Fed is committed to dropping borrowing rates, which will eventually trickle down to mortgage rates. Keep in mind that HELOC rates vary, so if rates drop, your interest rate will drop too.
Fourth, you can borrow money with a HELOC for anything. Whether you want to renovate your kitchen or bathroom, add a family room or pool, or pay off those high-interest credit card bills, you can do it all with a HELOC.
Fifth, you can borrow and re-borrow with a HELOC. When you pay off what you owe, you can reuse it, until the draw period ends. Some homeowners take out a HELOC to have as an emergency fund.
Last, a cash-out refinance can make sense in a low interest rate environment. This means replacing your first mortgage and taking out some of your equity. However, most homeowners with mortgages in 2024 have first mortgage rates below current market rates. It doesn’t make sense to do a cash-out loan or a HELOC refinance for a higher interest rate, so getting a home equity line of credit may be the best option.
Summary on HELOC Payment Terms
If you have equity in your home, a home equity line of credit offers an appealing option for inexpensive borrowing. We are still in a high interest rate and high inflation market, and borrowing money affordably has become more difficult.
You may be eligible to borrow your home equity for as little is 8% or 9% in 2024, which is some of the cheapest money you can find. However, you should understand that your HELOC payment will eventually rise when the draw period ends and the payment period begins.
Also, who want fixed borrowing costs may not want to do a HELOC. You could choose a home equity loan instead, which also borrows equity, but comes with a fixed interest rate.
If you are ready to take the plunge and get a HELOC or home equity loan, Refiguide.org can help you get more information and find the best loan program for your needs.
About Tom
Tom Murphy grew up in La Jolla, California surfing and carving his niche in the local real estate market. Mr Murphy has a stellar record as a loan officer with over a decade of experience helping people secure the right home loan. He now works at Movement Mortgage in Carlsbad CA. NMLS # 662141
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