Most homeowners understand that a HELOC is a home equity line of credit, but many do not understand how the HELOC repayment period works with a variable or fixed term. For many borrowers, a HELOC is an appealing financial product that offers the flexibility to borrow against the equity in their home. It allows homeowners to draw funds as needed, similar to how one might use a credit card, while providing a revolving credit line for large expenses such as home renovations, education, or credit card debt consolidation. However, when it comes to paying back the money borrowed, many potential borrowers are left wondering: Is the HELOC repayment period a fixed term?
To answer this question, we need to dive deeper into how HELOCs work, the structure of their repayment periods, and what borrowers should expect when it comes time to pay off their loan. In this article, we will explore these topics and uncover the flexibility and potential risks of HELOC repayment.
What is a HELOC Repayment Period?
Before we get into the details of HELOC repayment options, it is important to understand what a home equity line of credit is and how it operates.
The home equity line of credit allows you to borrow against the equity in your home.
Unlike a traditional home equity loan, which provides a lump sum upfront, a the HELOC with a fixed interest rates functions more like a revolving line of credit.
You can draw on it as needed, only borrowing what you require and paying principal and interest only on the amount you have borrowed.
A fixed interest rate HELOC is a loan allows you to borrow and reborrow like a credit card, but a fixed rate HELOC ensures a fixed monthly payment. Compare the home equity loan vs. HELOC.
Think of a HELOC as a financial faucet connected to the equity in your home. You can turn the faucet on when you need access to funds, and as long as you pay back what you borrow, you can continue drawing from it.
HELOCs are structured with two distinct phases: the draw period and the repayment period.
The HELOC Draw Period: Flexibility at Your Fingertips
The draw period is the initial phase of a HELOC, typically lasting between 5 and 10 years. During this time, you can borrow funds from your credit line up to the approved limit, and you’ll typically be required to make interest only HELOC payments on the amount you borrow. This makes the HELOC draw period a highly flexible and attractive option for homeowners who need access to cash but want to keep their minimum monthly payments low. The HELOC draw period does not offer a lump sum payment when the credit line is approved.
When you are only making interest payments, your line of credit does not get paid down. Is the HELOC Transfer and Withdrawal Instant?
Who wouldn’t want the ability to access thousands of dollars whenever needed, with the added bonus of only paying interest during the HELOC draw period?
This flexibility comes with a catch, however—since you’re only paying interest during the draw period, the principal balance remains the same. This means that when the draw period ends, there will be no more interest only payments and you will still owe the full amount borrowed, even if you’ve been making regular payments.
For example, if you open a $100,000 home equity line of credit and withdraw $60,000 at a 8,5% interest rate to add a swimming pool, you’ll only be required to pay the interest on what you’ve borrowed during the draw period $428 per month in this case.
If your kitchen remodel exceeds the initial budget, and you’re still within the draw period, you can borrow more funds, up to the limit. So, if you take out an additional $10,000, your minimum monthly payment would increase to about $60 more to $497. How Much Interest Would Be Paid on a $200,000 HELOC loan?
The HELOC Repayment Period: Fixed Term or Not?
Once the draw period ends, the home equity line of credit repayment period begins, typically lasting between 10 and 20 years. The key question is: Is this repayment period a fixed term? The answer depends on the structure of the credit limit or loan and the lender’s terms, but generally, yes, the repayment period does have a fixed term. Learn more about how the HELOC repayment works.
During the repayment period, borrowers must start paying both the principal and interest on the amount they borrowed during the draw period. These HELOC payments are often larger than those during the draw period because they include both the loan balance and interest.
While the repayment period is typically fixed, the monthly payments themselves may not be. Here’s why:
- Variable Rates: Many HELOCs come with adjustable interest rates, meaning that the interest rate can fluctuate over time, depending on market conditions. This variability can cause monthly payments to change during the repayment period, even though the term of the loan is fixed. If interest rates rise, borrowers may see their monthly payments increase, making it harder to budget. Learn more how HELOCs compound interest.
- Conversion to Fixed Rate: Some HELOCs offer the option to convert to a fixed-rate HELOC loan during the repayment period. This can provide borrowers with more predictable payments and eliminate the risk of rising interest rates. However, not all lenders offer the fixed rate HELOC option, and it may come with additional fees. Most 2nd mortgage lenders will offer a HELOC refinance.
A variable-rate HELOC is like riding a roller coaster—the ups and downs of interest rates can make for a thrilling but unpredictable financial ride. Learn more about how HELOC interest is calculated.
- Balloon Payments: In some cases, the repayment period may involve a balloon payment—a large lump sum due at the end of the loan term. This structure can be risky, as borrowers may struggle to come up with the necessary funds to cover the balloon payment. Borrowers should carefully review their loan terms to understand if a balloon payment is part of their repayment structure.
How to Get a Fixed Rate HELOC
Consumers ask us all the time if they can you get a fixed rate HELOC. Up until recently all home equity credit lines came only with adjustable rates. Several lenders and banks rolled out a fixed rate HELOC option and it has been very popular with homeowners that are nervous about rising interest rates.
Fixed Rate HELOC Conversion – This option converts an interest only HELOC from an adjustable to a fixed interest rate once the draw period ends.
Fixed Rate HELOC Refinance – Many homeowners refinance their variable HELOC into a fixed rate home equity loan after the repayment period ends.
The Impact of Variable Rates on the HELOC Repayment Period
As mentioned earlier, many HELOCs come with variable interest rates. These rates are typically tied to an index, such as the prime rate, which can fluctuate based on the broader economy. When the index rises, so does the interest rate on your HELOC, and consequently, your monthly payments increase.
Imagine your HELOC as a boat sailing on the ocean, with variable interest rates acting as the waves. In calm seas (low interest rates), your journey is smooth and manageable, but when a storm hits (rising rates), the waters become rough, and your payments can surge.
For homeowners entering the repayment period with a variable-rate HELOC, the risk of rising interest rates can create uncertainty. As HELOC rates increase, so do monthly payments, making it difficult to plan and budget for the long term. Some borrowers choose to convert their HELOCs to a fixed-rate loan to mitigate this risk, but this option isn’t always available or may come with additional costs.
Variable vs. Fixed HELOC Repayment: Which Is Right for You?
The decision between a fixed-rate and variable-rate repayment period depends on your financial situation and risk tolerance.
- Fixed-Rate Repayment: This offers stability and predictability. You know exactly how much you’ll be paying each month, and you won’t be subject to rising interest rates. The HELOC with a fixed rate repayment can be a good option for homeowners who prefer consistency and want to avoid the uncertainty of market fluctuations. You may also want to consider refinancing into a home equity loan or doing a traditional cash-out refinance.
- Variable-Rate Repayment: A variable-rate repayment period may start with lower monthly payments, but the risk lies in the potential for rising rates. If you’re willing to take on some risk in exchange for lower payments upfront, this option might work for you. However, keep in mind that interest rates can rise, sometimes significantly, over the life of the loan.
Is the short-term benefit of lower payments worth the potential long-term risk of increasing interest rates?
Key Considerations When Entering the Repayment Period
Before committing to a HELOC, it’s important to consider several factors that will affect your repayment period:
- Interest Rate Caps: Many variable-rate HELOCs have interest rate caps, limiting how high the rate can go. Be sure to check your loan terms for these caps, as they can protect you from extreme rate hikes.
- Loan-to-Value Ratio (LTV): The LTV ratio represents the amount of your loan compared to the value of your home. Lenders may restrict how much you can borrow based on this ratio, so if your home’s value declines, your borrowing power may be reduced.
- Prepayment Penalties: Some HELOCs come with prepayment penalties, which charge you a fee for paying off the loan early. If you plan to pay down your HELOC quickly, make sure to understand any early termination or pre-pay penalties associated with early repayment.
Is the HELOC Repayment Fixed?
In summary, while the repayment period for a HELOC generally has a fixed term, the monthly payments may not always be fixed due to variable rates. Borrowers should carefully consider their HELOC terms and consider their financial situation before choosing a home equity line of credit, especially if they’re opting for a variable rate. For those who prefer stability, converting to a fixed-rate HELOC or equity loan may offer peace of mind.
Think of your HELOC journey as a road trip. While you know the final destination (the end of the repayment period), the path can be filled with twists and turns, especially if you’re navigating adjustable interest rates.
By understanding the structure of HELOCs and planning for the repayment period, you can make informed decisions that help you manage your finances effectively and avoid unexpected surprises down the road
When you are ready to shop home equity loans and HELOCs, the RefiGuide will help you shop for the best HELOC lenders online. There is never any application fee and no obligation whatsoever.
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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