How does HELOC repayment work?

Home equity lines of credit provide access to your home’s equity without refinancing your current mortgage. Learn more about how HELOC repayment works, how you can repay your balance faster, and refinancing options to lock in a better rate.

Lee Huffman
August 28, 2023
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A HELOC is a line of credit secured by your home’s equity. When you open a home equity line of credit, you are given a maximum credit limit based on your home’s appraised value, existing mortgage balance, ability to repay, and other factors.

Homeowners can borrow and repay their HELOCs repeatedly throughout the draw period. During this time, they only pay interest when they borrow against the line of credit. Monthly payments are interest-only and vary based on how much of the HELOC is outstanding. When the draw period expires, the HELOC converts into a term loan with a fixed interest rate and monthly payment amount. After conversion, the repayment period is typically 20 years.

HELOCs are generally cheaper than a cash-out refinance because many banks waive closing costs and origination fees. However, you may have to repay those costs if you close your HELOC early or do not use it.

Draw period

HELOCs offer a draw period for the first five to ten years. This allows borrowers to draw from their line of credit an unlimited number of times based on their needs. Borrowers often use their HELOC to consolidate debt, pay off credit cards, fund home improvement projects, or pay other bills. They can borrow as little or as much as they want, up to their maximum line of credit amount. As borrowers repay their balance, this increases their available credit to borrow again.

Borrowers can access their HELOCs in numerous ways. The options vary based on the lender, but may include physical checks, a debit card, online bill payment, transfers to linked bank accounts, or calling customer service.

During the draw period, monthly payments are interest-only. However, you can always pay extra to reduce your balance and lower future interest expenses. Interest charges accrue based on the amount outstanding each month. If your balance is zero, there are no interest charges.

HELOCs have variable interest rates that change with the Prime Rate. Generally, the interest rate is the Prime Rate plus an add-on of 1% to 3%. However, rates vary among lenders, and your rate may be affected by your credit score. You may be able to find lower rates by shopping around.

Some lenders allow borrowers a fixed-rate option during the draw period. They can convert some or all of their outstanding balance into a fixed-rate term loan based on the rates available at that time. These loans offer fixed monthly payments and defined repayment terms.

Understanding HELOC payments

HELOC payments are unlike traditional mortgages and loans. Monthly payments are based on your outstanding balance and current interest rates. As your balance increases or rates go up, so do your monthly payments. If you don’t borrow against your line of credit, you won’t owe any money.

Let’s look at a sample HELOC situation. You have a $50,000 HELOC but have only borrowed $10,000. The interest rate is 6%, and there are 30 days in this statement cycle. Your interest-only HELOC payment is $49.32 for the month.

However, your balance will not change if you only make the minimum interest payment. You must make extra payments in order to reduce your balance and lower your monthly minimum payment.

Even if your balance stays the same, your monthly payment may change due to interest rates. The Federal Reserve changes interest rates throughout the year based on the economy. The uncertainty of rising rates and how they affect payments can be challenging for some borrowers.

Factors affecting HELOC repayment

The two primary factors affecting monthly HELOC payments are the outstanding balance and interest rates.

How does my balance affect payments?

Your monthly payment depends on how much you’ve borrowed from your HELOC. If you have a zero balance, there is no payment due. However, if you max out your line of credit, your payment will increase substantially.

How often can the interest rate change on a HELOC?

A factor that is out of your control is interest rates. Most HELOCs are based on the Prime Rate, which is variable. The Federal Reserve can change rates up to eight times throughout the year. These changes can affect your payment amount since banks typically pass these changes on to customers.

In a rising interest rate environment, your monthly payment increases as rates go up. To bring your payment down, you’ll need to focus on reducing your balance.

heloc-repayment

Strategies to pay down HELOC debt

Reducing your HELOC balance not only gets you closer to being debt-free, but it also can boost your credit score and reduce your monthly payment. Extra cash every month can accelerate your debt payoff or provide opportunities to save and invest toward your other goals.

Here are some quick strategies to help pay down your HELOC debt by increasing your income or reducing your expenses:

  • Pick up a side hustle
  • Sell unused items around your house
  • Switch jobs for higher pay
  • Cancel unused subscriptions
  • Rent out a spare bedroom
  • Refinance or consolidate debt

Refinancing or consolidating HELOC debt

With interest rates rising, some homeowners want to lock in a fixed rate on their balance to ensure the payments don’t become unaffordable. Homeowners have numerous financing options to consider based on their needs and goals.

Cash-out refinance

Borrowers can refinance their existing mortgage to get cash out and pay off their HELOC debt. This consolidates two loans into one monthly payment and locks in current interest rates.

Convert balance to a fixed rate

Some lenders allow borrowers to convert their HELOC balance into a fixed-rate option. This term loan has a fixed interest rate and monthly payment. When the loan term is over, the balance is zero.

New home equity loan

You may find a better deal elsewhere rather than sticking with your current lender. Getting a new home equity loan allows homeowners to shop for the best rates and terms from various lenders. With a new home equity loan, you can pay off your HELOC balance and, if you like, request additional money.

Home Equity Investment (HEI)

A Home Equity Investment (HEI) by Point allows homeowners to access their home’s equity without having monthly payments. You’ll receive a lump sum from Point that you can use to refi your HELOC, pay off debt, or use for other purposes. Unlike these other financing options, there are no income requirements, and you don’t need perfect credit to access your equity. Instead, you’ll share a portion of your home’s future appreciation with Point.

Final thoughts

Home equity lines of credit allow homeowners to tap their equity without refinancing their original mortgage. They offer flexible repayment terms and interest-only payments. However, your balance doesn’t go down unless you pay extra every month. Plus, rising interest rates could make payments unaffordable. Take steps to pay down your HELOC balance as fast as you can, including picking up a side hustle, canceling subscriptions, or selling unused items around your house. Refinancing your debt and replacing your HELOC can also put you on the path to being debt-free.

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