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Is Your HELOC Draw Period Coming to an End? Here’s What to Know

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If you have a home equity line of credit (HELOC), you can withdraw money from your open HELOC line during what’s known as the draw period. HELOCs work like credit cards by providing you with a revolving line of credit, letting you borrow what you need, when you need it. Once you get approved for a HELOC loan, you can use this money to pay for home repairs and other major life expenses as needed.

However, once the draw period comes to an end, you can no longer access these funds. You will also need to start repaying the money borrowed plus interest. It's important to know how much of your HELOC has been utilized, so you don't run out of money in the middle of your project or life event. Learn more about the HELOC draw period and what this means for your finances.

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Yellow notepad with pen svg icon Lesson Notes:
  • During the draw period, borrowers can spend their HELOC funds as they please, but they won’t be able to access this money once the draw period ends.
  • Borrowers will need to start making monthly payments to include interest once the repayment period begins.
  • It’s important to keep track of when the draw period ends so that borrowers can prepare for their first monthly payment.

What is the HELOC draw period?

HELOC loans have two phases: the draw period and repayment period. During the draw period, you are free to spend these funds however you see fit. HELOCs are known for their flexibility. You can transfer directly to your checking or savings account, giving immediate availability to your funds. The draw period lets you focus on the task at hand. You don’t have to worry about paying the money back just yet; however, you may have to pay the required interest only payment that has accrued during this time.

Many people will use these funds to make home repairs or build additions that ultimately add value to the property. Keep in mind construction projects can be unpredictable. It may be hard to know how long it will take to complete the project. If you are using a HELOC to fund your home improvement project, you should be able to finish your project during the draw period; otherwise, you may run out of money before the job is done.

You can also replenish your credit on the HELOC account by repaying some of what you spent. Like a normal credit card, you can borrow more money once you pay off some of your outstanding balance. You can repeat this process as many times as you want during the draw period. 

The repayment period begins as soon as the draw period ends. You can no longer access the HELOC funds, and you will have to start paying off all the money you spent plus interest. The outstanding balance will be divided into a series of regular monthly payments spread out over the next 15 years.

The transition from the draw period to repayment in a HELOC is a pivotal moment for borrowers. Johnson and Sarama (2015) emphasize this shift, stating, “The conclusion of the draw period signifies a major shift in HELOCs, moving from a flexible credit line to a more structured, amortizing loan. This change can lead to increased payments, impacting borrowers' financial strategies and decisions.” It's important for borrowers to comprehend this shift to effectively plan their finances and manage the upcoming repayment obligations.

When does the HELOC draw period end?

The draw period typically lasts either five (on the standard product) or ten (on the variable product) years. It starts the moment you first receive the funds and ends on a specified date. If you don’t know when the draw period ends on your HELOC loan, check the terms and conditions to find the exact time and date. You can also contact your lender and ask for another copy of the loan agreement. This should give you plenty of time to finish your project.

Once the draw period ends, access to your open HELOC account will end automatically, and you will no longer have access to these funds. You won’t be able to borrow more money unless you re-finance the HELOC and re-open your credit limit.

How to prepare for the end of the draw period

You will also need to prepare for the end of the HELOC draw period so you are ready for your first monthly payment once the repayment period kicks in.

As the HELOC draw period concludes, proactive planning becomes crucial for adapting to the forthcoming payment adjustments. Epouhe and Hall (2016) shed light on this, observing, “The end of the draw period marks a transition to fully amortizing payments from interest-only payments, potentially causing a significant payment increase. Borrowers should prepare for this change by considering options like refinancing or restructuring the HELOC to mitigate the impact effectively.” These insights stress the importance of early preparation and considering alternatives like refinancing for a smoother transition.

Calculate what you owe

It’s important to calculate how much you owe on your HELOC loan and how much you will have to pay every month. Your monthly HELOC payment can have a significant impact on your personal finances. It may be several hundred dollars or more, depending on how much you spend during the draw period.

You should receive a statement from the lender when the draw period ends with information about your repayment plan, including how much you owe, the specified interest rate or annual percentage rate (APR), your estimated monthly payment and when it is due. Your HELOC may come with a fixed interest rate or a variable rate that will change over time.

Your monthly payment may change from month to month if you have a variable interest rate. Calculate how much your monthly payment could change based on changing interest loan rates.

Set up a payment plan

Once you calculate how much you owe, you can start budgeting accordingly to ensure you pay off the loan on time. You may need to reduce your monthly expenses now that you have a higher monthly HELOC payment.

When paying off your HELOC loan, it’s best to put as much money toward the principal as possible to minimize interest. If you have extra money at the end of the draw period, consider putting it toward the principal to get out of debt as soon as possible.

However, you may need to refinance the loan if you can’t afford your monthly payment once the draw period ends. You can refinance the loan into another HELOC and start a fresh draw period. This gives you more time to make your first payment.

Some financial institutions also offer a home equity loan, which is distributed as a lump sum, and you can use this money to pay off your HELOC. Most home equity loans come with a fixed interest rate and set plans, so you don’t have the option of renewing your credit.

You can also refinance your adjustable-rate HELOC into a fixed-rate loan to save money on interest.

Contact your lender if you want additional HELOC resources, need help paying off your HELOC loan, or would like more information about the draw period.

Citations

Johnson, K., & Sarama, R. (2015). End of the Line: Behavior of HELOC Borrowers Facing Payment Changes. ERN: Credit Risk (Topic). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2662632

Epouhe, O., & Hall, A. (2016). Payment shock in HELOCs at the end of the draw period. Journal of Economics and Business, 84, 131-147. https://www.sciencedirect.com/science/article/abs/pii/S0148619516000163?via%3Dihub

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