How do HELOC payments work?

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.