HELOC draw period

What is the HELOC draw period?

A HELOC draw period is the number of years you can withdraw funds from your home equity line of credit. During this time, you are typically required to make interest-only payments. Like a credit card, you can borrow and repay the loan as you wish, as long as your balance doesn't exceed the total credit limit.

For example, let's say you have a HELOC with a 10-year draw and a 20-year repayment period. During the first 10 years, you can borrow up to your credit limit and make interest-only payments. After that, the draw period ends, and you’ll start repaying both principal and interest. Your minimum payment will be calculated based on the remaining balance spread out over the 20-year repayment period.

However, draw and repayment periods can vary by bank. According to Randall Yates, co-founder of VA Loan Network in Shavano Park, Texas, "Ten years is standard, but draw periods can range from five to 15 years depending on the lender. Some hybrid HELOCs recast early or adjust credit limits mid-draw based on property values or credit changes, which many borrowers don’t anticipate."

Therefore, it's important to not only understand your HELOC when you take the loan, but also to stay up to date on any changes that could occur during the course of the loan.

How do HELOC repayment terms work?

HELOCs have two periods: the draw period and the repayment period, each with its own repayment terms.

During the draw period, repayment is typically interest only. You don’t need to pay back the principal, but you do have to make monthly payments to cover any interest that accrues.

However, you can choose to make additional payments to reduce the principal balance if you wish. Making extra payments during this time lowers your overall costs, since a smaller balance accrues less interest.

Since a smaller balance accrues less interest, you’ll save more in the long run if you make extra payments during the draw period.

Once the draw period ends, the repayment period begins. You’ll start making both principal and interest payments. These payments are usually higher than during the draw period since you’re now required to pay down the full balance.

Using our example from above, let's say you borrow $25,000 at an annual percentage rate (APR) of 8.5%. During the draw period, your payment would be about $177. This would cover interest only and wouldn’t reduce the balance. After 10 years, the payment would jump to about $216 since you’d begin repaying the $25,000 balance over the remaining 20-year term.

Also, keep in mind that interest rates on HELOC accounts are often variable, so your payment can increase or decrease as interest rates move up and down.

How to manage your HELOC effectively

As with any loan, you'll want to ensure that you are not taking on more debt than you can easily repay. HELOCs can be especially dangerous since you are only required to make interest-only payments for several years. With repayment possibly a decade away, it’s easy to lose track of what you’ll eventually owe.

Also, since the interest rate is variable, your payment can change at any time. If interest rates rise, your payment will likely follow, potentially leading to an unexpected increase in costs. If interest rates rise just as the repayment period is kicking in, then your payment could end up being more than you can afford.

"Treat it like a mortgage, not a credit card,” Yates told us. “Set a payoff plan during the draw period, keep usage below 75% of your limit and build a ‘HELOC buffer’ savings fund. If variable income is involved, automating extra payments helps offset rising interest costs over time."

Another common pitfall is borrowing more than you should simply because the interest might be tax deductible. The potential tax break can make the loan feel more affordable, but it doesn’t reduce the amount you owe or the risk of falling behind.

To ensure that you don't find yourself with an unaffordable payment, keep your balance low. Consider making additional principal payments during the draw period, even though you aren't required to do so. This serves two purposes:

• Extra payments will help keep your overall balance down, thus lowering your overall costs.
• Having larger payments in your budget from the start will mean the higher payments during the repayment period will be less of a shock.

If you are concerned about your future payments, there are some proactive steps you can take. "Request a future amortization schedule by year seven to prep for the payment jump. If that looks unmanageable, refinance or convert part of the HELOC to a fixed-rate segment early. In a crunch, consider transferring part of the balance to a personal loan with fixed terms," said Yates.

» MORE: Fixed-rate HELOCs: a cross between HELOCs and home equity loans

What are the potential risks of a HELOC?

The biggest risk of a HELOC is that the bank can foreclose on your home if you default on the loan. Yates said, "HELOC lenders can sue for a deficiency or place a lien timed to home appreciation. For investment properties, defaults may trigger personal judgments, bypassing asset protection." This is a big risk and not one to take lightly.

Another major concern is the variable interest rate. HELOCs typically don’t have a cap on the interest rate. This means that if interest rates spike, your payments could increase dramatically without warning. What started out as an affordable loan could potentially start straining the budget.

Lastly, if you are using your HELOC to pay off other debts, such as consolidating your credit cards, then you may end up in even more debt than you started with. If you are considering this, ensure that you have a plan to stop accruing additional debt while still paying off your HELOC.

In closing, Yates said, "Don't rely on HELOCs for emergencies; avoid drawing late in the term, and monitor home equity to prevent unexpected line reductions. Limit use to planned, repayable expenses — not lifestyle inflation."

Should I open a HELOC with a draw period?

Most HELOCs come with a draw period by default, typically lasting five to 10 years. During this time, you can access funds as needed and only make interest payments, but that flexibility can mask the long-term cost. Once the draw period ends, your payments increase significantly as you begin repaying the principal.

If you're disciplined about borrowing, make extra payments early and understand how the repayment period will affect your budget, a HELOC can be a smart option. But if you’re not prepared for the shift in payment structure, the draw period can lead to financial strain down the road.