HELOC Repayment Explained: Everything You Need to Know

The initial draw period of a HELOC, with its low interest-only payments, is appealingly simple. However, the game changes completely when you enter the repayment period. Understanding this phase is crucial to managing your debt effectively and avoiding financial stress.

What is the Repayment Period?

The repayment period is the second phase of a HELOC, which begins immediately after the draw period (typically 10 years) ends. During this time:

• You can no longer withdraw funds from your line of credit.
• Your loan is converted into an amortizing loan. This means your monthly payment is calculated to pay off both the principal balance and the interest over the remaining term (usually 10 to 20 years).

How Repayment is Calculated: An Example

Let's illustrate payment shock with a clear example. Imagine you have a $100,000 balance on your HELOC at a 9% interest rate.

As you can see, your payment increases, and this doesn't even account for potential interest rate hikes in a variable-rate environment.

Strategies to Manage HELOC Repayment

• Pay Principal During the Draw Period: The best strategy is to not wait. Voluntarily pay more than the interest-only minimum each month during the draw period to reduce your principal balance.
• Refinance the HELOC: Before the draw period ends, you can explore refinancing the remaining balance into a new loan, such as a fixed-rate home equity loan or a traditional mortgage, to get a predictable payment schedule.
• Plan and Budget Ahead: At least a year before your repayment period begins, use a calculator (like ours!) to estimate your new principal and interest payment. Adjust your budget accordingly to avoid being caught off guard.
• Contact Your Lender: Some lenders may offer options or flexibility if you communicate with them proactively about upcoming payment challenges.