HELOCs give you access to a revolving source of funds. The lender will let you borrow up to a certain percentage of your home equity. HELOCs usually come with adjustable interest rates that change over time. However, some lenders offer lines of credit with fixed interest rates for specific periods. Generally, the longer the fixed-rate applies, the higher the interest rate.
Once you get approved for a HELOC, you can choose how you receive these funds, such as getting a check in the mail or an online transfer. HELOCs come in two phases.
The first phase is known as the draw period, which usually lasts ten years. During this time, you can withdraw funds using your preferred method and use them however you like. Most lenders only ask that you pay off any interest you have accrued during the draw period, but you are usually free to pay more than the required amount every month.
Once the draw period ends, you can no longer access additional funds from the account and will need to start making regular monthly payments plus interest until the principal amount has been paid off. By the end of the repayment period, you will need to pay back the entire principal amount of the loan plus any interest that accrued at the agreed-upon rate. This step is known as the repayment period.
Some lenders also require a minimum draw amount, so you may need to withdraw additional funds at the end of the draw period to satisfy these requirements.
You may be able to apply for an extension to the draw period if you need more time to use the funds or aren't ready to start making regular monthly payments. However, extending the draw period only increases the amount of interest you will pay over the life of the loan. Consider making regular monthly payments to pay off the principal amount as fast as possible during the draw period. The quicker you pay off your debt, the more you will save on interest over time.
Some lenders will give you several different repayment options, which can last anywhere from 10 to 20 years or more. Again, the longer the life of the loan, the more you will pay in interest.
Your monthly payments will likely more than double during the repayment period. Consider the following example to get a sense of how these periods will affect your finances. Let's say you borrow $50,000 with an annual percentage rate (APR) of 5%; you would only have to pay around $208 a month during the draw period when only interest payments are required. Your monthly payment will increase to about $416 per month when the draw period ends. You'll need to budget for these monthly payments accordingly to make sure you don't fall behind.