Last updated: December 27, 2023

Mortgage Products

How do HELOC payments work?

Couple in their home discussing how do HELOC payments work.

Please note: Discover® Home Loans offers a home equity loan product, but does not offer HELOCs.

A home equity line of credit (HELOC) is an excellent tool for homeowners who need access to cash to finance things like home renovations or repairs.

This type of mortgage allows you to borrow funds by using the equity in your home as collateral. The amount of money you can borrow depends on your home equity, and payments vary depending on how much you borrow and the terms of your loan.

Quick facts about HELOC repayments

  • A HELOC generally consists of two phases: the draw period with interest-only payments and the repayment period with principal and interest payments.
  • During the draw period, borrowers are permitted to only make interest payments. After this initial period ends, borrowers switch to making full principal and interest payments for the remainder of the term.
  • There may be prepayment penalties if you decide to repay your HELOC early as well as an annual fee in some cases, so compare offers from multiple lenders before signing up for a loan to find the best repayment option for your needs.

The HELOC repayment process

Generally, the HELOC payment process consists of two phases:

  • The draw period where interest-only payments may be made
  • The repayment period where you make principal plus interest payments

During an initial draw period — typically 5-10 years — the borrower only makes interest payments. After the draw period ends, the repayment period begins. During this period, borrowers 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 work is key to ensuring you get 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 that 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 can draw from your line of credit as needed and make interest-only payments on the borrowed amount.

This period typically lasts 5-10 years, depending on your lender and the terms of your agreement. Once this period is over, you'll 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 cover 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 help avoid any potential penalty fees.

HELOC interest and principal payments

Once the draw period ends, you'll make principal and interest payments each month to pay off the remaining balance owed on your loan agreement, with interest rate accrual over time.

These payments are calculated based on your variable interest rate and the money remaining in your line of credit. So, they can vary monthly depending on your usage and future rate conditions.

HELOC payment examples

If you're considering a home equity line of credit (HELOC), it's important 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 the first ten years when only interest payments are required. That jumps to approximately $1,110 monthly for ten years when the repayment begins.

Another HELOC payment example would be if you had a $30,000 HELOC with a 7% APR. In this scenario, payments should cost around $175 a month during the first ten years when interest-only payments are due and about $350 a month for ten years when repayment begins.

Monthly payments vary with changes in money taken out 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 the 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.

It's always best to 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

Since a HELOC can be confusing, many people may need clarification on how it works and what the repayment process entails. Here are some answers to common questions about HELOC payment:

Do HELOCs have closing costs?

Yes, there can be closing costs associated with taking out a HELOC. These costs may include application fees, appraisal fees, origination fees, title search fees, and more. The exact amount of these costs will vary depending on the lender and other factors, with some lenders not charging any costs at closing. Make sure to 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 offer flexible repayment options that allow borrowers to pay back their loans within their time frame (e.g., bi-weekly payments). Be sure to talk with your lender about prepayment penalties and other options to find the best repayment plan for your budget.

What is a HELOC repayment period?

The repayment period refers to the length of time during which you must repay your HELOC balance in full. These periods typically range from 5-25 years and often depend upon the amount borrowed and other factors such as credit score and income level. Understanding the repayment period before signing up for a loan is essential to ensure that it fits within your financial goals and timeframe for repayment.

HELOC alternatives

If a HELOC’s structure and variable interest rates don’t fit your needs, you can always 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 against 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 and provides more stability than other loans.

Additionally, this type of loan often comes with lower interest rates than credit cards or personal loans, but it does require you to have good credit and meet certain collateral requirements.

With a home equity loan from Discover Home Loans, you may be eligible to borrow $35,000 to $300,000. You can review the requirements for a home equity loan to learn more.

Cash out refinance

Another option is a cash out refinance. With this type of refinancing, you take out a larger loan than what currently exists on your mortgage and use the difference between the two loans as cash in hand. For example, if your home is worth $400,000 and the current balance on your mortgage is $150,000, you might be able to refinance for $200,000 and get $50,000 in cash after paying closing costs.

You can use an online tool like a cash out refinance calculator to find out how much cash you may be able to get if you go this route.

Final thoughts: How does HELOC repayment work

If you're considering getting a HELOC or are currently paying one back, it's important to understand how repayments work. Knowing your options and what to expect, you can make the best decision for your financial situation.

Remember that if you think you want to pay off your HELOC early, you may have to pay prepayment penalties.

Once you’re ready to get a HELOC, home equity loan, or similar mortgage, compare multiple lenders to find the best repayment option for your needs.

If you’re looking for a fixed rate alternative to a HELOC, Discover Home Loans offers home equity loans and cash out refinances with low fixed rates and zero costs due at closing. 

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