How do HELOC payments work?

The HELOC repayment process

Generally, the HELOC payment process consists of two phases:

• The draw period
• The repayment period 

During the draw period — typically five to 10 years — the borrower usually only makes interest payments. After the draw period ends, the repayment period begins. During this time, borrowers normally make principal and interest payments for the remainder of the loan.

A HELOC offers homeowners quick access to borrowed funds but requires consistent repayment to lower costs and avoid penalties or defaults. Understanding how your payments will work is key to getting the most out of a HELOC.

How HELOC repayments work

Below we'll break down the HELOC draw period, interest-only payments, and principal and interest payments so you can make informed decisions about your HELOC loan repayment strategy.

The HELOC draw period

When you open a HELOC, you will enter the "draw period." During this time, you may draw from your line of credit as needed and make interest-only payments on the borrowed amount.

This period typically lasts five to 10 years, depending on your lender and the terms of your agreement. Once this period ends, you may need to pay both principal and interest on your balance.

HELOC interest-only payments

During the draw period, your monthly payments will typically only cover the interest accrued on your outstanding balance from month to month. However, your lender may require that each payment covers at least a certain percentage of your total balance. 

Before applying for a HELOC, make sure you understand what your lender may require for repayment to avoid any penalties.

HELOC interest and principal payments

Once the draw period is over, you'll make principal and interest payments each month to pay off the remaining balance owed on your loan agreement . Interest will accrue over time.

These payments are calculated based on your variable interest rate and the money remaining in your line of credit. How much you pay can vary monthly depending on your usage and future rate conditions.

HELOC payment examples

If you're considering a HELOC, you’ll want to understand how your lender will calculate your payments.

For example, payments on a $100,000 HELOC with a 6% annual percentage rate (APR) may cost around $500 a month during a 10-year draw period when only interest payments are required. That jumps to approximately $1,110 a month when the 10-year repayment period begins.

Another HELOC payment example would be if you had a $30,000 HELOC with a 7% APR. In this scenario, payments may cost around $175 a month during the 10-year draw period and about $350 a month during the 10-year repayment period.

Monthly payments may vary depending on the money you use and interest rate changes, so pay attention to these two factors when calculating a HELOC’s monthly costs.

HELOC prepayment penalties

A prepayment penalty is a fee you may have to pay if you decide to repay your balance fully or partially ahead of schedule. Depending on your loan agreement, this could include a portion of the principal and all or some remaining interest payments.

Check with your financial institution before making any extra payments. Understanding the terms around prepayment penalties is essential before taking out a HELOC since these fees may limit your ability to make additional payments on your loan without incurring extra costs.

HELOC payment FAQs

Many people may need clarification on how a HELOC works and what the repayment process entails. Here are some answers to common questions about HELOC payments:

Do HELOCs have closing costs?

Yes, there can be closing costs associated with taking out a HELOC. These expenses may include application fees, appraisal fees, origination fees, title search fees, and more. The exact amount of these costs may vary depending on the lender and other factors, with some lenders not charging any costs at closing. 

Ask your lender for an itemized list of all closing costs before you sign any documents.

Do you pay back a HELOC monthly?

Most lenders require borrowers to make monthly HELOC payments just as they would with any other loan. However, some lenders may offer flexible repayment options that allow borrowers to pay back their loans at different time intervals (e.g., bi-weekly payments). 

Talk with your lender about repayment options that may be available to you so you can budget more effectively.

What is a HELOC repayment period?

The repayment period refers to the length of time a borrower must repay their HELOC balance in full. These periods typically range from five to 25 years and often depend on the amount borrowed and other factors such as credit worthiness and income level. 

Understanding the repayment period before signing up for a loan is important. As a result, you can ensure your payment plan aligns with your financial goals.

HELOC alternatives

If a HELOC’s structure and variable interest rates don’t fit your needs, you might want to choose a similar product like a home equity loan or cash-out refinance.

Home equity loan

A home equity loan differs from a HELOC in that it allows you to borrow money from the equity you've built up in your home and receive a lump sum rather than tapping into a revolving line of credit. A home equity loan usually has a fixed rate so may provide more stability than other loan types in some cases.

Additionally, this type of loan usually requires you to have good credit and meet certain collateral requirements.