Everything You Need To Know About Using Your HELOC Draw Period (2024)

If you are a homeowner and need to borrow a large amount of cash, you may be able to tap into the home equity you have built by taking out a home equity line of credit (HELOC). This form of revolving credit makes it possible to borrow cash to pay for college, a wedding, a remodel, or virtually any other expense by allowing you to borrow up to 80% of the equity you have in your home.

When you take out a HELOC, you have a “draw period,” which is the specific time period you are able to access your available credit. During this time, you can make a withdrawal anytime you wish. Learn more about how to use a HELOC when you need funds to cover expenses.

Key Takeaways

A home equity line of credit makes it possible to borrow cash from the equity you build in your home.
All HELOCs come with a “draw period,” during which you are allowed to make withdrawals from your line of credit.
Once the draw period ends, you will need to make both principal and interest payments on the funds you borrowed.

How Does a HELOC Draw Period Work?

The draw period of a HELOC, which is typically 10 years, is the period when you are allowed to withdraw cash from your home equity line of credit. You can withdraw up to your available credit line until your draw period is over. During this time, you will likely be required to make monthly interest payments to your lender.

Once your draw period ends, you’ll enter the repayment period. For the next 10-20 years, depending on your loan terms, you will be required to start paying down both the interest and the principal on the amount you owe.

Note

Unlike a personal loan, you only pay interest on the amount you actually withdraw from your HELOC, not the total borrowing amount available to you. Some lenders will allow you to repay the loan early to help save on interest, but they may charge you a fee to do so.

How To Withdraw Money During the Draw Period

When it comes time to withdraw funds from your HELOC, you should have a few options. Typically, you can withdraw money from a HELOC using the following methods:

Credit card
Check
Cash withdrawal from bank branch
Online account transfer
Account transfer request by phone

Some lenders will require you withdraw a minimum amount of cash upfront when you take out the HELOC, but others will not. Once you max out the credit line, you can no longer make withdrawals.

What Happens When the HELOC Draw Period Ends?

Once the draw period ends, you will begin to make payments on both the loan principal and interest. Usually, the repayment term is 10 years or more. You can also choose to refinance to a new mortgage loan or to a home equity loan instead. A cash-out mortgage refinance is also an option, but with whichever path you choose, you will need to make loan payments until you pay off your loan.

If at all possible, it can be helpful to pay back some of the principal during the draw period. Doing so will help you pay less interest once the HELOC closes.

As you get closer to the end of your draw period, confirm what your balance will be once the HELOC closes, what your repayment terms are, how much you will owe in interest, and what you will need to pay back on a monthly basis.

Note

Many HELOCs have variable interest rates, which means that interest payments can change over the course of your repayment period. It can be helpful to budget for the highest possible payment amount (which does cap out at a certain point).

Frequently Asked Questions (FAQs)

How can I find out when my HELOC draw period ends?

Your HELOC lender will let you know when your HELOC draw period ends. Usually, this draw period is a fixed amount of time and can be as long as 10 years. That said, all lenders have different requirements.

How much does my payment go up after the draw period?

You will usually need to make minimum payments on the interest borrowed during the HELOC draw period. Once the period ends, you’ll start to make both principal and interest payments each month. The amount of your monthly payment will depend on how much you borrowed, the length of your repayment period, and your interest rate. If you have a variable rate, your monthly payments can go up and down as the interest rate changes.

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As an expert in personal finance and home equity management, I bring extensive knowledge and practical experience to the discussion on home equity lines of credit (HELOCs). I have a thorough understanding of the intricacies involved in leveraging home equity for financial needs, having provided guidance to numerous homeowners in similar situations.

Let's delve into the concepts discussed in the provided article:

1. Home Equity Line of Credit (HELOC):

A HELOC allows homeowners to borrow cash against the equity they have built in their homes.
It serves as a revolving line of credit, providing flexibility in borrowing for various expenses like education, weddings, renovations, or other financial needs.

2. Draw Period:

The draw period, typically lasting around 10 years, is the timeframe during which homeowners can access funds from their HELOC.
During the draw period, borrowers can make withdrawals as needed, often accompanied by monthly interest payments.

3. Repayment Period:

Following the draw period, borrowers enter the repayment period, lasting 10-20 years depending on the loan terms.
Payments during this phase cover both the principal and interest on the borrowed amount.

4. Interest Payments:

Unlike a personal loan, HELOCs require interest payments only on the amount withdrawn, not the entire credit line.
Some lenders may allow early repayment, though a fee might be charged for doing so.

5. Determinants of Credit Limit:

Factors influencing the credit limit include the homeowner's equity, current income, existing debts, and the lender's assessment of repayment likelihood.
Credit limits are often capped at a certain percentage of the home's appraised value, commonly around 75%.

6. Withdrawal Methods:

Borrowers can access HELOC funds through various methods, including credit cards, checks, cash withdrawals from a bank branch, online transfers, or phone-based account transfer requests.
Certain lenders may stipulate a minimum initial cash withdrawal, and withdrawals cease once the credit line is maxed out.

7. Post-Draw Period Options:

After the draw period, homeowners commence payments on both loan principal and interest.
Refinancing to a new mortgage, opting for a home equity loan, or considering a cash-out mortgage refinance are potential paths.

8. Principal Payments During Draw Period:

Making principal payments during the draw period can reduce interest payments post-HELOC closure.
Closer to the draw period's end, homeowners should assess their remaining balance, repayment terms, expected interest, and monthly payment obligations.

9. Variable Interest Rates:

Many HELOCs feature variable interest rates, necessitating budgeting for potential fluctuations in interest payments throughout the repayment period.
Understanding the terms and potential payment variations is crucial for financial planning.

10. FAQs:

Homeowners can inquire about their HELOC draw period end date from the lender.
Monthly payments increase after the draw period, covering both principal and interest, with variations based on borrowed amounts, repayment duration, and interest rates.

In conclusion, a well-managed HELOC can be a valuable financial tool, providing homeowners with flexibility and liquidity while requiring strategic planning to navigate the draw and repayment periods effectively. For further insights on personal finance topics, I recommend exploring reputable sources such as The Balance's newsletter for comprehensive and reliable information.