How does HELOC repayment work? Guide to HELOC payments

Gina Freeman
Gina Freeman
The Mortgage Reports Contributor
August 16, 2022 - 6 min read

How to repay a HELOC

A home equity line of credit (HELOC) can provide much-needed cash for home improvements and other financial goals. This type of loan may be an affordable and easy way to tap into the value of your home.

But HELOCs come with risks, too. Many lines of credit come with variable interest rates that can change as often as every six weeks. And when your rate changes, your payment does, too.

Fortunately, there are options to minimize the risk of higher interest rates and monthly payments. Here’s how to develop an exit strategy that makes your HELOC more affordable, no matter what happens.


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How a HELOC draw period works

HELOC loan terms are divided into two parts: the draw period and the repayment period.

During the draw period, you can borrow as much money you like, as often as you wish — up to your approved credit limit. In this way, a HELOC works much like a credit card with a revolving line of credit. Depending on your loan terms, the draw period ends in five, 10, or 15 years. At that point, you can no longer take money from your HELOC.

During the draw period, you typically pay interest only on the money you’ve borrowed. But remember that these interest-only payments will not lower your debt. (Though some banks may issue you a minimum monthly payment with the principal included.)

After the draw period, you’ll enter the repayment period. During this time, you can no longer borrow money from your HELOC and must repay any outstanding principal balance with interest.

How the HELOC repayment period works

HELOC repayment terms can be unpredictable. Because HELOC interest rates are variable, your rate and monthly payment can change throughout the repayment period — making it more difficult to budget for HELOC payments than, say, a fixed-rate home equity loan or cash-out refinance.

What’s more, some HELOC customers don’t remember how long they have to repay their loan. Draw periods often last 10 years, or longer. By the end of the draw period, it’s often hard to remember what the original loan paperwork detailed, and exactly what you signed up for.

For instance, some HELOCs come with a total 30-year term: a 10-year draw period and a 20-year repayment period. Others require repayment in as little as five years following the draw period.

What you’ll owe when you enter the repayment period

When your HELOC draw period ends, the loan recasts. This is when you begin the repayment period. In some cases, HELOC payments can more than double during the repayment period.

For example: A 15-year HELOC with a $20,000 limit at 4.9% interest will require a minimum payment of about $160 per month. However, if you have a 10-year draw period, that means your repayment period is just five years. A payoff of that length will require interest and principal payments totaling $375 per month.

That’s not the only concern, however. Keep in mind that most HELOCs carry a variable interest rate. If the HELOC interest rate rises, the minimum payment goes up even more.

Balloon payments

In some cases, lenders may require a balloon payment at the end of the draw period. This is a larger lump sum that pays off the outstanding balance of your HELOC. It could be thousands of dollars, and your lender could foreclose on your home if you default on your loan.

Make sure you review the terms of a HELOC very carefully before signing on. You should fully understand the loan’s structure and what your repayment period will entail before taking out a HELOC.

What to do before your HELOC resets

Homeowners are typically not required to pay down their HELOC loan balance during the draw period. But you can often choose to start paying down your HELOC early if you wish. And you might see big savings by doing so.

If you’re in the early stages of your HELOC, now’s the time to consider an exit strategy. The below chart shows how the repayment period length and the interest rate affect the monthly cost of a $20,000 loan amount.

Repayment Term 4.00% 6.00% 8.00% 
20 Years$120$140  $170
10 Years$200$220  $240
5 Years$370$390  $400

Now is the time to take action and get your outstanding balance down to an affordable range — before you’re obligated to a higher payment than you can afford.

The table below shows how reducing your outstanding balance before the repayment period begins can keep your payment affordable.

Balance 4.00% 6.00% 8.00% 
$20,000$370$390  $405
$15,000$275$300  $305
$10,000$185$195  $200

Coming up with a lump sum of cash isn’t a solution for everyone. You might have to take other action to prevent your HELOC payment from rising beyond your reasonable ability to pay.

On the other hand, be aware that your lender may charge a prepayment penalty for those who pay off their loan balance too early. So make sure to check before paying in full.

Alternative HELOC repayment options

If your HELOC draw period is nearly at an end, or you can’t afford to start throwing bigger payments at your loan balance, you still have repayment options.

1. Refinance into a second mortgage

Consider refinancing your HELOC into a fixed-rate second mortgage. You can’t draw any more on a fixed second mortgage — the balance will only go down as you make your monthly payment. Additionally, the fixed interest rate makes budgeting much easier.

2. Pay off your HELOC with a cash-out refinance

A cash-out refinance is available to applicants who are wrapping a first and second mortgage into one home loan. Even though you are not getting a lump sum of cash, many lenders consider paying off a HELOC a cash-out transaction.

Some programs consider paying off a second mortgage a “rate-and-term” refinance, and these may come with lower interest rates.

Lenders may consider a HELOC consolidation refinance a “no-cash” loan if the second mortgage was used to buy the home or if you have not taken any draws in the past 12 months.

3. Refinance into a home equity loan

Much like a line of credit, a home equity loan also allows you to leverage the value of your home. Depending on your situation, you may be able to pay off your HELOC with the lump sum of cash from a home equity loan. This could give you a fixed interest rate and set minimum payments.

4. Refinance into a new HELOC

Refinancing your HELOC may be an option. If you can find one with a low introductory APR, then it can help keep your monthly payments manageable and give you more time before your principal repayments begin. Similarly, a new HELOC with a fixed-rate option could keep your payments from fluctuating month to month.

5. Loan modification

Your lender may offer some form of private modifications to your HELOC. For example, some approve conversions to installment loans with fixed payments. You are more likely to receive this assistance if your mortgage balances exceed the value of your home, making foreclosure less attractive to your lender.

6. Take out a personal loan

While likely a last resort, a personal loan could be an option to pay off your HELOC. This type of loan does have benefits — they are unsecured, which means you won’t have to use your home as collateral. Further, if you can qualify for one at a fixed rate, then your set monthly payments are easier to budget.

But personal loans also have disadvantages, like higher interest rates and the potential for variable interest rates. So be sure to review your options carefully before committing.

Avoid higher HELOC payments

HELOCs can be a good source of inexpensive, flexible financing for home renovations, real estate investments, debt consolidation, and more.

Before getting into one, however, create your exit strategy. To avoid skyrocketing HELOC repayments, many homeowners are combining their first and second mortgages into a new loan with a lower interest rate. Talk to a mortgage lender about your options.