The draw period for a home equity line of credit (HELOC) is the period of time after a HELOC has been opened and before the repayment period begins. HELOC terms vary, and a HELOC can serve many purposes. For most HELOCs, the only payments due during the draw period are the interest payments, with no payments due toward the principal.  

Home Equity Line of Credit Basics

Both a HELOC and a 澳洲幸运5官方开奖结果体彩网:home equity loan are based on the equity you have in your home at the time you get them. To calculate your home's equity, estimate the current value of your home. Next, subtract the current balance on your mortgage and any other existing loans on your home. This gives you the equity you have in your home.

You generally cannot take out a HELOC or home equity loan for more than 80% of the equity in your home. Less-optimal borrowers, such as those with poor 澳洲幸运5官方开奖结果体彩网:credit scores or high 澳洲幸运5官方开奖结果体彩网:debt-to-income ratios, would be able to access less than 80% of their home equity. For example, if you have a home valued at $500,000 with a mortgage balance of $300,000, you would have $200,000 in equity and be able to take out a HELOC or home equity loan for up to $170,000, depending on eligibility.

A HELOC and a home equity loan 澳洲幸运5官方开奖结果体ไ彩网:differ in how you can use the✅ equity in your home and how you have to pay it back. A home equity loan gives you a single lump-sum payment of your chosen amount, which you repay in equal monthly payments over a set period of time.

A HELOC gives you access to a credit line up to your set limit. You can use as much or as little of this credit line as you would like during the draw period. You are obligated to make interest payments only on the balance until the repayment period begins. At that time, you will have to make payments on the interest as well as the 澳洲幸运5官方开奖结果体彩网:principal of the credit you used.

HELOC Draw Period

The HELOC draw period varies in length based on the terms of each individual HELOC. Generally, a🤡 draw period is between five and 15 years, with 10 being the most c🍬ommon. The repayment period is usually longer: between 10 and 20 years.

During the draw period, up to the limit on the HELOC may be spent. The only payments due on most HELOCs during the draw period are minimum p👍ayments that go towards interest due on the balance only.

It is possible for borrowers to continuously borrow up to the limit on their HELOC and pay it off repeatedly. This strategy is popular with real estate investors, who use a HELOC to buy and rehab additional properties and then repay the HELOC so they can 澳洲幸运5官方开奖结果体彩网:buy more properties without taking out extra loans.

Any additional principal payments made during the draw period on a HELOC will reduce the payments due during the HELOC's repayment period. During the draw period, your online account through your HELOC servicer should show you estimates of what your monthly payment will be during the repayment period.

What H𒉰appens at the End of theܫ HELOC Draw Period?

When the draw period on a HELOC is reached, no more money may be spent on the credit line. Payments due will increase significantly to include payments toward the principal so that the principal and interest are paid off by the end of the HELOC repayment period. 

Many borrowers aren’t prepared for these payments to increase, so they open new lines of debt to pay off the existing HELOC. This is known as debt 澳洲幸运5官方开奖结果体彩网:reloading and can lead to a vicious cycle that is hard to break. You can prepare for your HELOC repayment period and avoid debt reloading by making payments toward the principal on your HELOC during your draw🍌 period. Before the draw period ends, make sure there is room in your budget to repay your HELOC when your payments increase.

Rolling a HELOC into a new HELOC, home equity loan, or 澳洲幸运5官方开奖结果体彩网:cash-out refinance can be an attractive option, but doing so reduces the equity you have in your home, which can quickly cause you to be 澳洲幸运5官方开奖结果体彩网:underwater on your mortgage. To make sound financial decisions, make sure you spend your HELOC draw period money on things you actually need.

Frequently Asked Questions

The Bottom Line

Learn about the terms of any HELOC before signing up for one. Be aware of the length of your draw and repayment periods and ensure there are no 澳洲幸运5官方开奖结果体彩网:prepayment penalties if you choose to make additional payments toward your principal during your draw per𝔉iod. 

During your draw period, log in regularly to monitor your payments during t▨he repayment period and budget accordingly so that you can afford the increase. Before putting up your home as collateral for any loans or credit lines, consider the ramifications of what happens if you cannot afford to pay them back.