How Does HELOC Repayment Work?
When you take out a home equity line of credit (HELOC), you will go through two phases: the draw period and the repayment period.
During the draw period, you can borrow funds as needed. However, you will need to make payments during this time.Ā Once the draw period ends, the repayment period begins, and you will be required to repay both the principal and interest.
The specifics of the draw and repayment periods, including payment amounts and terms, can vary depending on the lender you choose.
At HFS FCU, we offer competitive HELOC rates and terms, including a low introductory rate for the first year1 and up to $2,000 in closing costs covered by the credit union on approved lines2.Ā Our HELOCs have up to two 5-year draw periods, and the monthly payments are computed using a 20-year amortization period.Ā Read on to learn more.
1The HFS Home Equity Line of Credit introductory Annual Percentage Rate (APR) of 0.99% is good for twelve (12) months. After the 12 month introductory period, the APR will be based upon the Prime rate (index) as published in the Wall Street Journal plus a margin of .50% for loans up to 80% loan to value (LTV) or the Prime rate plus a margin of 1.50% for loans up to 100% LTV. The non-introductory fully indexed variable rate is 7.25% for loans up to 80% LTV with a maximum credit line of $500,000 and 8.25% for loans up to 100% LTV with a maximum credit line of $100,000 as of 1/01/2026. The APR may be adjusted quarterly on the first day of January, April, July and October with a maximum rate of 18%. The index value is determined as of 10 days before the date of any annual percentage rate adjustment. The current index value is 6.75% as of 1/01/2026.Ā 2The current rate that would have applied without the initial discounted rate. Minimum credit line of $5,000.
Understanding the HELOC Draw Period
The draw period is the initial phase of a Home Equity Line of Credit (HELOC) and lasts for 5 years at HFS FCU. During this time, you can borrow money up to your credit limit.Ā
HELOC are unique because they function like a credit card or a revolving line of credit. You can borrow only what you need during the draw period, repay it, and borrow again as necessary. This flexibility makes a HELOC useful for various purposes, such as home improvement projects, emergencies, or consolidating high-interest debt. This setup differs from conventional loans, in which you receive a lump-sum cash payment upfront.
How Draw Period Payments Are Calculated
To calculate your monthly interest payment, use the following formula:
- Monthly interest payment = (Principal balance x annual interest rate) / 12
Keep in mind that HELOCs often come with variable interest rates, so your monthly payments may vary from month to month as rates change.Ā
The HELOC Repayment Period Explained
Once the draw period ends, the repayment period for your Home Equity Line of Credit (HELOC) begins. This phase typically lasts between 10 and 20 years and requires borrowers to make monthly payments that include both principal and interest.Ā Additionally, you cannot borrow any more money once the repayment period starts.
Calculating Repayment Period Payments
To determine your monthly payments during the HELOC repayment period, you can use a loan amortization formula, which takes into account the outstanding principal, the interest rate, and the agreed-upon repayment term. Remember that HELOCs usually have variable interest rates, which can change over time and affect your monthly payment.
Strategies to Manage HELOC Repayment
Since your payments could significantly increase once the draw period ends, itās important to explore ways to make repayment more manageable. Here are some tips for effectively managing HELOC repayment:
- Budget Wisely: Create a detailed and realistic budget that accounts for your monthly cash flow while prioritizing your HELOC repayment. Since interest rates may rise, use a loan calculator to estimate your expected monthly payment during the repayment period, and allow some flexibility for potential changes in interest rates.
- Consider Converting to a Fixed-Rate Loan: Some lenders allow borrowers to convert a portion of their variable-rate HELOC balance into a fixed-rate loan. This might be a good option if you expect interest rates to rise in the future, are nearing the end of the draw period, and prefer predictable payments, or your financial situation has improved. You can secure a low fixed rate.
Early Repayment Options
If you want to pay off your HELOC (Home Equity Line of Credit) balance early, there are several strategies you can implement:
- Verify Application of Extra Payments: Extra payments may not always be applied directly to your principal balance. Make sure to confirm that any additional funds are allocated correctly. If the online payment system doesnāt allow you to specify this easily, contact your lender directly to instruct them on how you would like the extra funds applied.
- Make On-Time Payments: Making timely payments is the most effective way to build a strong credit score. A good credit score can help you secure a better interest rate and reduce your overall borrowing costs. On the other hand, late or missed payments can harm your credit score and lead to higher interest rates.
What to Do When Your Draw Period Ends
When your Home Equity Line of Credit (HELOC) draw period ends, you can no longer withdraw funds, and you will enter the repayment period. Itās important to understand your loan terms and calculate your new payment. You can continue making your scheduled payments as before. However, if you are unable to do so, there are several financing alternatives available:
- Refinance into a fixed-rate home equity loan: This option offers a lump-sum loan with a fixed interest rate, providing more predictable repayment terms.
- Cash-out refinance: You could refinance your primary mortgage for a higher amount and use the difference to pay off your HELOC.
- Personal loan: If your credit is excellent, a personal loan might be a viable option to cover your HELOC balance.
If none of these options are suitable, the best course of action is to contact your lender and try to negotiate an agreement.
HELOC Refinancing Alternatives
Each HELOC refinancing option mentioned has its pros and cons. Most refinancing options require you to have equity in your home, while a personal loan does not. All options, however, necessitate having a good credit score to qualify. We recommend contacting your lender to explore these options and determine which one is best for your situation.
Ready to Take Control of Your Home Equity?
For more information about HELOCs and the advantages of working with HFS FCU on your loan, please contact us today to speak with one of our experts. When you choose HFS FCU, you can expect not only competitive rates and flexible terms but also unmatched member service compared to the big banks. Contact us today to learn more.
FAQs
Can I make principal payments during the HELOC draw period?
At HFS FCU, payments during the draw period include both principal and interest.
What happens if I canāt afford the higher repayment period payments?
If you are unable to make the higher payments during the repayment period, you may face significant financial consequences. If you find yourself in this situation, contact your lender immediately to explore possible solutions. You might also consider refinancing your HELOC into a fixed-rate second mortgage or looking into a cash-out refinance.
Can I pay off my HELOC early without penalties?
While there is no penalty if you pay off the HELOC early, the borrower will be liable to reimburse the credit union if the plan is closed within the first 36 months of plan opening.
Will my interest rate change when I enter the repayment period?
Yes, HELOCs typically have variable interest rates, which are likely to fluctuate with market conditions.
Whatās the difference between HELOC payments and home equity loan payments?
The main difference is that home equity loans are provided as a lump sum with fixed payments, while HELOCs offer a revolving line of credit with variable payments that you can draw from as needed. Home equity loans provide payment predictability, whereas HELOCs offer more flexibility, allowing you to borrow only what you need.
How do I know when my draw period is ending?
To find out when your draw period ends, check your HELOC agreement for the specific end date. Additionally, your lender will likely notify you before the draw period concludes.
Can I refinance my HELOC with another lender?
Yes, refinancing your HELOC with a different lender is a common practice to secure a lower interest rate and reduce your monthly payment. However, this can present challenges, such as a decrease in home value or stricter requirements from the new lender.
