What Is The HELOC Draw Period? How Does It Work?

What is the HELOC lottery period?

A home equity line of credit (HELOC) is a financing tool that converts home equity into usable funds. It works just like a credit card. You can borrow as needed, up to the approved limit. However, unlike a credit card, a HELOC involves two main phases: a debit period and a repayment period. Together, these two periods can last up to 30 years.

The HELOC drawing period is the first stage of financing. During this period, you can withdraw money as many times as you like up to the limit. Generally, you don’t have to repay everything you borrow during the drawing period. Instead, you can pay the minimum monthly payment. In fact, in many cases you only have to pay interest on the amount you borrow at a variable rate.

In some cases, HELOCs may come with a lower introductory fee for a set period of time, such as six months. Some HELOC lenders also allow you to convert some or all of your balance to a fixed rate.

How does the HELOC lottery period work?

During the lottery period, your loan limit will be set based on your home’s equity. You can borrow up to the limit, repay it, and borrow money as many times as you like until the drawing period ends. This setting makes HELOCs ideal for projects where the final cost is uncertain or has a long duration.

Let’s say you take out a $30,000 line of credit and borrow $20,000 at 9% interest to renovate your kitchen. During the drawing period, you only need to pay monthly interest on the amount borrowed, which in this scenario is $150.

What if your kitchen renovation exceeds your budget? You can borrow up to the maximum amount during the lottery period. For example, if you borrow an additional $5,000, your minimum monthly payment increases to $187.50.

How to make the most of the HELOC lottery period

Here are some best practices to consider to maximize the value of your HELOC and use it wisely.

• Create a financial strategy for your HELOC and identify specific projects, expenses, or purchases you want to cover with the funds.
• When starting a HELOC, check to see if your lender requires a minimum withdrawal upfront. Next, schedule your upcoming draws.
• Monitor your balance frequently to make sure you’re not spending more than you can reasonably repay.
• Even if you don’t need to repay the principal during the draw period, you can continue to repay your debt by paying more than the minimum amount (i.e. interest only).

There is generally no limit to the number of times you can draw on a HELOC. Paying off your outstanding balance also replenishes your credit line with available funds, allowing you to borrow those funds again if you need to.

What is the repayment period for a HELOC?

Once the drawing period ends, the HELOC moves into the repayment period. At this point, you will no longer be able to borrow more than your credit limit and will begin repaying the amount you borrowed. Make monthly payments that include both principal and interest over a set period of time (up to 20 years).

You can pay off your HELOC before the draw period ends, but be aware of early repayment penalty fees. If your HELOC balance is already zero at the end of the drawing period, your account will typically be automatically closed.

You’ll only be charged for the unpaid balance at the end of the drawing period, so your monthly payments will depend on the amount you borrow and the interest rate on your HELOC. Keep in mind that HELOCs typically have variable interest rates, so your payments can increase from month to month.

How are payments calculated during the repayment period?

Once you enter your repayment period, HELOC payments are calculated based on the same amortization schedule used for regular mortgages.

Let’s say you owe $25,000 on a HELOC, the interest rate is 9%, and the repayment schedule is 10 years. In this case, principal and interest would be $317 per month.

However, the interest rate on a HELOC can fluctuate. If the interest rate increases to 10%, your payments will increase to $330 per month. Here’s a breakdown of how your monthly payments will change for a $25,000 HELOC balance.

What to do before the HELOC lottery period ends

As you near the end of your HELOC draw period, it’s time to review your loan to prepare for what’s next. John Giles, senior vice president of home lending strategy and support at TD Bank, recommends contacting your lender and asking:

• Can the interest rate change during repayment?
• Is the repayment interest rate fixed or variable?
• How much will my monthly payments change?

Most lenders will notify their customers at least six months before the draw period ends. However, if you’re not sure when your loan will go into repayment, contact your lender’s servicing department.

What to do when the HELOC lottery period ends

If you think you might not be able to cover your monthly bills during the repayment period, there are several ways to refinance your HELOC.

• Open a new HELOC. Some lenders allow you to open a new HELOC and roll over some or all of your old HELOC balance. You will have to pay interest on the balance, but it will return within the withdrawal period of the credit, thus avoiding paying the principal. Although this will delay the inevitable, starting a new loan facility with a new draw period may be the most immediate option.
• Pay off your HELOC with a home equity loan. Home equity loans also utilize your own equity, but are different from lines of credit. This means that the money is paid to you in a lump sum and you start repaying it immediately at a fixed interest rate. However, choosing this method may increase your overall interest payments.
• Refinance your HELOC and mortgage with a new loan. Now that interest rates appear to be going down, you might consider refinancing. This means combining both your line of credit and your mortgage into a new mortgage. This is a more cumbersome option, but it may be a good way to streamline all your debts into one large loan. If you can afford it, consider a 15- or 20-year mortgage to reduce the number of total interest payments.
• Consider a cash-out refinance. Cash-out refinancing is the process of taking out a new mortgage for more money than you currently owe on your home and receiving the difference in cash. You can use that extra money to pay off your HELOC balance. However, cash-out refinancing usually only makes sense if you can get a lower interest rate.
• Take out a personal loan. If you have access to a large enough personal loan, you can use it to refinance your HELOC. This option is best for borrowers who can get competitive interest rates due to their excellent credit. Otherwise, you’ll simply be trading one debt for a more expensive debt.

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Additional reporting by Mia Taylor