How Do HELOC Repayments Work? Terms, Conditions & More (2024)

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How do HELOC repayments work?

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What is a HELOC?

To understand what is a HELOC, let’s start by explaining home equity and the role it plays in this type of loan. Each time a homeowner makes their monthly mortgage payment, they are accumulating equity or ownership of the home. Home equity is the difference between the appraised value of the home and the amount still owed on the mortgage.

For example:

Appraised value $600,000 – Amount owed on mortgage $250,000 = $350,000 Equity.

Having equity in your home opens the door to getting secured loans that are based on the home’s equity and use the house as collateral.

A HELOC is a type of secured loan that lets you borrow money in the form of a line of credit, with the amount based on your home’s equity. Lenders will decide on your loan amount based on the amount of equity you have in the home, and the more equity you have, the more you’ll likely be able to borrow.

Understanding the draw period vs. repayment period

All HELOCS have a “draw period” (typically 10-15 years) and a “repayment period” (typically up to 20 years). Be sure to ask your lender about repayment terms so you understand your financial responsibility and can budget for this expense.

HELOC draw period. During the draw period, you can borrow as much of the funds as you need. Payments made during the draw period are calculated as “interest only,” meaning you aren’t repaying the entire loan or the principal amount. Some lenders will allow payments toward principal during the draw period, to help make it easier for people to manage their finances by avoiding a large “balloon” payment when the repayment period starts.

HELOC repayment period. After the draw period ends, the HELOC repayment period begins. At this time, most HELOC interest rates will adjust to a fixed rate and monthly payments will include both principal and interest on the outstanding balance.

Do you need to make payments during the draw period?

Yes, most HELOCs required an interest-only monthly payment during the draw period.

Repaying a HELOC is essential. A HELOC is a secured loan for which your home is the collateral. Failure to make on-time payments or failure to pay entirely could result in the lender foreclosing on your home.

Another common question is, “can you pay off a HELOC during the draw period?”

Yes, most lenders will let you pay off a HELOC during the draw period, however, you may be charged a pre-payment penalty of doing so. As such, be sure to ask your lender if there is a fee for paying the loan off early.

How to make HELOC repayments

Repaying a HELOC is similar to repaying the debt you accrue on a credit card: you will only repay the amount that you borrowed from your credit limit. However, the amount will now include principal and interest.

As your repayment period nears, your lender will most likely send you a letter or notification stating the new loan terms. Don’t be caught off guard. If you’re unsure of the expectations or need to discuss the repayment amount, call your lender as soon as possible to avoid missing a payment.

Each lender will have unique repayment terms and conditions. Typical HELOC repayment terms range from 10 to 20 years.

How to calculate your HELOC payment

The easiest way to determine what your repayment amount will be is to contact your lender. Your lender will be able to provide you with the interest rate and the balance that you will need to repay.

Payments can typically be made by the same method you’ve been making payments thus far, such as online, by check, or through recurring payments automatically withdrawn from your checking or savings account.

Is it possible to renew a HELOC?

HELOC refinance options include refinancing to another HELOC, or paying the loan off entirely through a cash-out refinance, or paying it off using funds from a fixed-rate home equity loan. Some lenders may allow you to do a loan modification to lower the interest rate or convert to a fixed rate, without having to refinance.

Do HELOCs require balloon payments?

A balloon payment in the mortgage arena describes a large payment when a low introductory interest rate or an interest-only payment period ends. Types of loans that may feature a balloon payment are HELOCs and Adjustable Rate Mortgages (ARMs), which commonly start with the borrower paying interest-only monthly payments.

HELOCs don’t necessarily require balloon payments, however, because of the way the loan is structured, you could end up with a large payment (principal plus interest) when the loan’s draw period ends.

How to avoid high HELOC payments

Many homeowners with a HELOC are taken by surprise by the amount they owe when the draw period ends and the repayment period starts, particularly if they haven’t paid off or paid down the amount borrowed. One way to avoid a large “balloon” payment at the end of the draw period is to make payments toward the principal balance during the draw period.

What to do if you can't make your HELOC payments

If you’ve used a significant amount of your HELOC and find that you are not able to make the payments, it’s critical that you find a financial strategy to help you repay the loan. If you fail to pay or make late payments, not only will you end up paying a lot in interest and penalty fees, the lender can start a foreclosure and you could lose your home.

If you’ve accepted a HELOC and doubt your true ability to repay the loan, you may cancel the loan within three days if you’re using your main residence as collateral. The three-day cancellation rule is a federal rule that says you have three business days, including Saturdays but NOT Sundays, to reconsider a signed credit agreement that secures your principal residence and cancel the deal without penalty.

Here are some strategies to help you pay off your HELOC:

Refinance your HELOC into a second mortgage. A HELOC may be refinanced into a second mortgage at a fixed rate. This option doesn’t allow any funds to be drawn from the loan. You will need to make payments until the loan is paid off.

Cash-out refinance. A cash-out refinance involves replacing a current mortgage (including your HELOC) with a new mortgage loan (typically at a lower interest), and in the process, borrowing more money than what is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash at closing.

Refinance into a home equity loan. Similar to a HELOC, a home equity loan lets you borrow money from a lender against the equity in your home. The amount of the loan a borrower is eligible for is determined by the difference between the home’s market value and the remaining mortgage balance, including how much you owe in your HELOC. You may be able to refinance your HELOC directly into a home equity loan. Keep in mind you’ll pay interest on the full loan balance, even if you don’t use it.

Refinance into a new HELOC with a fixed-rate. You may shop around and find that HELOC rates have come down since you took out your HELOC. If this is the case, you may consider refinancing into a new HELOC.

Apply for a personal loan. Personal loans can be used for anything, including paying off debt. While you may end up paying a higher interest rate than you have on your HELOC, a personal loan can be used to pay off a HELOC (depending on how much of a personal loan you qualify for and how much you own on the HELOC).

Learn about the pros and cons of getting a HELOC.

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