What is the draw period on a HELOC?

Many homeowners turn to home equity lines of credit (HELOC) when they're looking to accomplish their goals with flexibility—whether that be home improvements, debt consolidation, or bill payment. With rates often the lowest on the market—saving you thousands compared to personal loans and credit cards—it's a rather appealing product.  

However, what's flexibility for some can spell financial trouble for others. Since a HELOC offers two phases, it's easy to overborrow and find yourself stretched thin come the repayment period. That's why understanding the draw period is crucial for making the most of your HELOC and avoiding financial pitfalls. 

What is the draw period on a HELOC? 

The draw period is the initial phase of a HELOC, which typically lasts between 5 and 10 years. During this phase, borrowers can draw funds as needed, up to their approved credit limit. 

Besides having a flexible line of credit, the other appealing aspect of the draw period is that borrowers are on the hook for interest-only payments during the phase. This can keep costs relatively low and give you more time to pay off larger expenses. 

Once the draw period ends, the repayment phase begins. During which, borrowers are responsible for principal plus interest payments over a 20-year term.

How to get the most out of the HELOC draw period

Avoid overborrowing

It's critical to remember that after the draw period ends, you'll be responsible for paying everything back—balance plus interest. Overborrowing can lead to excessive debt—and high monthly payments—that you may not be able to afford. 

Instead, set a budget that you can commit to. Consider only using the funds for investments that provide value, like home improvements that increase property value. Then, check-in regularly to keep track of withdrawals and monitor your outstanding balance.

Check out a free HELOC interest-only calculator here.

Pay off balance

Although you won't be required to pay off the balance monthly, you should. Whether you can pay it in full or just make extra payments, chipping away at the principal will lower future costs. It's a straightforward way to make the transition to the repayment period more manageable and limit surprises. Just be sure to confirm with your lender that there are no prepayment penalties. 

Consider converting to a fixed-rate loan

HELOCs have variable interest rates that fluctuate with the market. If you anticipate rising rates, ask your lender to convert a portion of the HELOC balance into a fixed-rate loan. This will allow you to lock in a lower rate while market conditions are favorable. It can also create a predictable monthly payment schedule during the repayment phase. 

What to do when the HELOC draw period ends

Homeowners have a few repayment options when the time comes. Options for HELOC repayment include:

Make extra payments

Just like with the draw period, the most straightforward way to pay down your HELOC faster is through extra payments. 

Create a budget and allocate what you can to paying down the debt. Consider using any cash windfalls, like bonuses or tax refunds, to reduce your balance.

Refinance the HELOC

Depending on your needs, refinancing your HELOC may be a strategic move. If your credit score has improved, you may be able to score a lower rate. Additionally, if you have new financial goals, a refinance can extend your draw period to give you more flexibility. 

Pay off the HELOC with a home equity loan

If you'd prefer fixed monthly payments, paying off your HELOC with a home equity loan is a viable option. You can lock in a fixed rate and steady repayment term of 5 to 30 years. 

You'll need sufficient equity to cover the cost of the HELOC, and should also bear in mind that you'll have closing costs and fees to cover. 

Use a home equity investment

Like a home equity loan, a home equity investment (HEI) offers a single lump sum to cover the balance of your HELOC. However, unlike home equity loans and HELOCs, there are no monthly payments with an HEI. Instead, you repay your investment by sharing a percentage of your home's appreciation at the end of the term. There is a flexible, 30-year term – meaning you can repay at any point with no prepayment penalty. 

HEIs can be a solid move if you need more time without a monthly payment. If your credit or income has taken a hit since you took out your HELOC, you may still be eligible for an HEI. There are no income requirements, and homeowners can qualify with a broader range of credit scores. 

Leverage a cash out refinance

A cash-out refinance replaces your existing mortgage with a higher balance, allowing you to pocket the difference. Refinancing can help you consolidate your HELOC debt into a single loan for more manageable payments. 

Since the new mortgage will offer a new rate, refinancing should only be considered if you can secure more favorable terms. 

Leverage this free cash-out refi vs home equity loan calculator here. 

Frequently asked questions

Can you repay a HELOC during the draw period?

Yes, you can repay a HELOC during the draw period. While only interest payments are required, you should aim to make additional principal payments. It's the best way to reduce your overall borrowing costs and walk into the repayment period with minimal obligations.

What is the withdrawal period for a HELOC?

The withdrawal period, or draw period, is typically 5 to 10 years. During this phase, you can leverage your revolving line of credit up to the predetermined limit as needed. Every month, you'll pay only interest on the HELOC balance. 

What are the downsides of a HELOC?

HELOCs carry a few downsides that should be taken into consideration. One major drawback is its variable rate, which can cause monthly payments to fluctuate. Additionally, easy access to funds may lead to over-borrowing. This can result in significantly higher payments, which can quickly strain finances. Most importantly, since a HELOC is secured by your home, failing to make payments could result in foreclosure. 

Final thoughts

A HELOC can be a valuable tool when used wisely. It's best to have a plan for both the draw period and repayment phase to avoid over-borrowing or cash strain. Proactive planning can help you make the most of your HELOC while maintaining financial stability and peace of mind.

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