HELOC Draw, Repayment Period: What to Know

Thanks to rising home prices, American homeowners are sitting on a lot of equity these days — About $270,000 Average per home owner.

That equity can be a powerful tool. one with HELOC — or a home equity line of credit — homeowners can even convert it to cash, then put those funds toward home repairs, unexpected bills, medical expenses or repayments High interest loans.

How do HELOCs work, though, and how do you pay them back? Before you borrow, it’s a good idea to familiarize yourself with the details of what you’ll owe and when. Here’s what you need to know.

Before you get started, explore the best home equity rates you can qualify for today here.

What is a HELOC draw period?

HELOCs There are two periods – draw period and repayment period.

“The draw period is simply the amount of time you have to borrow the loan funds,” says Mark Charnette, founder of American Prosperity Group. “After the expiry of the period, no further borrowing is allowed except for the qualification.”

The exact length of the home equity line of credit draw period varies by lender, but in most cases, you’ll have anywhere from five to 10 years to access your funds. Even if you don’t need to repay the borrowed amount during this period, you can start paying interest on that amount.

What is the repayment period of a HELOC?

The home equity line of credit repayment period is when you start paying off your loan. During this time, you’ll make monthly payments toward the principal and interest on your HELOC. These payments can fluctuate, as most HELOCs come with variables interest rateWhich is often combined.

“Repayment periods vary – typically between 20 and 30 years,” says Dan Richards, head of mortgages at Flyhomes.

In some cases, HELOCs may not have an extended repayment period and instead require a balloon payment, meaning you pay the entire balance back in full.

Find out the best home equity rates you can qualify for now!

HELOCs vs. Home Equity Loans

HELOCs are just one tool you can use Access your home equity, in addition to home equity loans. The big difference between these two products is how you get your money. With HELOCs, you withdraw your funds as you need — much like a credit card. Then, you only pay interest on what you use.

Home equity loans, on the other hand, come with a lump sum on which you will pay interest from the start.

“A home equity loan is a lump sum of cash equal to the home’s equity,” says Richards. “It’s best for one-time big expenses, often related to home improvements. But some homeowners choose to pay for other big expenses like education, weddings or medical emergencies.”

Home equity loans usually come with a fixed interest rate, so the rate or payment won’t fluctuate over time. For many homeowners, this makes it easier for them to budget and manage.

With both home equity loans and HELOCs, you may incur interest duty freeHowever, only if you use the money to “buy, construct or substantially improve” your primary residence, According to the IRS.

What are the benefits of using a HELOC?

The Big advantage of using a HELOC On a home equity loan (or other financial product) you can withdraw your funds over time. This makes you smart if you’re not sure how much money you need or if you have recurring expenses or expenses that spread out over time.

“Once a HELOC is in place, you can theoretically borrow money for any purpose and at any time,” says Charnette.

You won’t be stuck with a huge lump sum, and you can take what you need when you need it. This can help you reduce your interest costs in the long run.

Finally, most HELOCs only require interest payments while you are in the draw period. So, if you need some time before you start paying off your principal balance, they may be a good option to explore.

Getting a HELOC

HELOCs may not be an option for every homeowner. You will usually need one Good credit score (usually around 670 minimum), and you’ll need A lot of equity on your property. Most lenders require at least 15% to 20% equity share.

If not seen HELOC requirementsYou can consider one Cash-out refinancing. These will replace your existing mortgage with a new, larger one. Then, you get the difference back in cash.

Learn more about HELOCs and home equity loans you may qualify for today here.