What does the Draw Period of a US Home Equity Loan (HELOC) mean? How long is the Draw Period usually?

A home equity loan (HELOC) is used similarly to a credit card. Its draw period is the time during which the homeowner can withdraw cash at any time. The homeowner can use the money to renovate the house, plan a child’s wedding, or pay unexpected medical bills.

The specific amount that can be withdrawn is determined by the homeowner’s home equity. For example, if a homeowner has $300,000 outstanding on his mortgage and the current market value of his home is $600,000, he has $300,000 in equity. Depending on the homeowner’s credit score and debt-to-income ratio, a HELOC allows borrowing 60%-80% of the home equity. Because a HELOC has a withdrawal period, homeowners do not have to rush to withdraw money after applying, and can withdraw money when needed.

What exactly is the draw period for a HELOC?

The withdrawal period of a HELOC is generally 10 years. During this 10-year period, the homeowner can withdraw funds at any time until the withdrawal limit is reached, and the homeowner only needs to repay the amount borrowed. For example, if the homeowner’s HELOC credit line is $100,000, but only $20,000 is withdrawn during the entire withdrawal period, the homeowner will only need to repay $20,000 plus interest.

Some HELOCs require the homeowner to withdraw a certain amount after applying, but some do not. To withdraw money from a HELOC, the homeowner can use a debit card, check, cash directly from a bank/ATM, or wire transfer.

During the draw period, the monthly payment on a HELOC is very low, generally only paying interest on the amount drawn that month. Depending on the terms, the homeowner may also be able to pay back the principal directly, but some lenders may charge a fee for early repayment of the principal.

After the draw period ends, the homeowner generally has 20 years to repay the previously drawn amount. Some HELOCs have a balloon clause, which means that the entire loan plus interest is repaid in one lump sum at the end of the draw period.

What if you forget to pay the minimum amount during the withdrawal period? Generally, lenders give a grace period. If you make up the loan during the grace period, you only need to pay a late payment fee, and it will not be reported to the credit company. However, if you do not repay the loan after the grace period, the lender will report it to the credit company, which will affect the homeowner’s credit score. Therefore, the homeowner must make sure to check how long the grace period is.