What does the repayment period of a US home equity loan (HELOC) mean? What preparations can be made before entering the repayment period?

A home equity line of credit (HELOC) works similarly to a credit card. You pay back as much as you borrow, and it is divided into two stages: a draw period and a repayment period.

This article will focus on the matters needing attention during the repayment period. For the specific instructions on the withdrawal period, please refer to the following article⬇️

What should I do when entering the repayment period?

It is important to understand in advance how long the HELOC withdrawal period is, so that you don’t find out you can’t withdraw the money on the due date, or you are surprised by a sudden large bill.

When the withdrawal period is due (that is, when the repayment period begins), the homeowner needs to confirm in advance the amount of the loan he owes, the approximate monthly payment, and understand the interest rate. Generally speaking, the interest rate is fixed during the repayment period, but there are also HELOC projects that use a variable-rate HELOC, so if the homeowner is worried that the interest rate will fluctuate too much in the future, there is still time to adjust to a fixed-rate HELOC during the withdrawal period.

If the homeowner has not paid back the principal during the draw period, be prepared for a sudden increase in monthly payments when the draw period comes to an end! Generally speaking, the monthly payments during the repayment period are twice as much as during the draw period, because during the draw period, the homeowner only has to pay the interest. The homeowner must make sure that he or she can afford the loan during the repayment period, after all, the HELOC is secured by the house.

The application standard for HELOC is generally a minimum FICO credit score of 680. Because the house is used as collateral, homeowners should weigh the pros and cons and whether HELOC is appropriate based on their personal circumstances.

🌰For example: If your lender offers a 30-year HELOC that includes a 10-year draw period, you may only pay interest during the first 10 years of the draw period, but for the remaining 20 years, you will need to repay both principal and interest.

Since your HELOC interest rate is based on a base rate (usually the prime rate), your lender may add 1 to 2 percentage points to it. Therefore, it’s best to be conservative when estimating how much you can borrow to avoid a situation where you can’t make payments on time or repay the loan at the end of the draw period.