Understanding a HELOC: draw vs. repayment period

By Carina Boucher | Citizens

One of the most common questions lenders get when it comes to home equity lines of credit, or HELOCs, is, What’s the difference between a draw and repayment period? And it’s no wonder — there’s a lot to unpack when it comes to these! Let’s answer some of the most common questions.

Q: What is a HELOC?

A: A HELOC is a line of credit that is dependent on the amount of equity you have in your home. You can generally borrow up to 80% of the value of your home, minus what you still owe. There are two periods in a HELOC — the draw period and the repayment period.

Q: What is a draw period and how does it work?

A: The draw period for a HELOC works similarly to a credit card — you can borrow up to your approved amount for the duration of the draw period, which is typically 10 years. You’re given a set amount to borrow against, based on the equity you have in your home.

The draw period is the first period of the line of credit which you can typically access by writing a check, transferring funds through online banking or via your mobile banking app. However, these methods may not be available with all lenders and may also be subject to limits. You can withdraw money as often as you’d like, and you’ll only have to pay interest on what you’ve borrowed during the draw period.

Let’s say you take out a HELOC for $25,000, and you need to write a check to your contractor for $5,000. You still have $20,000 available to draw on at another time, and you’ll only need to pay interest on the $5,000 that you already drew.

Q: What is the HELOC repayment period?

A: The repayment period takes place once the draw period ends, which is typically 10 years after you start using the HELOC. You’ll no longer be able to borrow from your credit line, and you’ll start paying back the amount that you borrowed on top of the interest payments that were already taking place during the draw period on the amount borrowed.

The repayment period may seem far off, but you never know where you’ll be in 10 years. If you have the means, you could consider setting aside money now in anticipation of the upcoming repayment period. Your bank may even offer tools similar to our Citizens Savings Tracker™,¹ where you can set financial goals right in your mobile app and access the tools you need to create a personalized savings plan.

Monthly payments (including principal and interest, not just interest like during the draw period), will start in the repayment period. Typically you can have up to 20 years to make these payments. If you pay off your HELOC prior to the end of your draw period, you might have to pay an early repayment penalty, but it depends on your lender.

Your monthly repayment amount depends on the amount you borrow, as well as your HELOC’s interest rate. They typically have variable rates, so your payments could increase.

Q: What is a HELOC good for?

A: A HELOC is great for projects with long time periods or fluctuating, frequent costs like home repair, education, aging in place remodels, etc. Some people could also use it for debt consolidation since the interest rate is much lower than a credit card. It is typically ideal to use a HELOC only for things that will increase in value, but life happens, and expenses can come out of nowhere.

Q: How can I get started?

A: It’s important to research different banks and their current HELOC interest rates, any perks they may offer when opening one, and any sort of prepayment penalties that might apply. You can also read reviews to decide which bank is best for you. Once you feel confident, it’s time to apply — and you can usually do that right online! Here at Citizens we offer Citizens FastLine®, our award-winning digital application experience that allows you to get a HELOC faster and with less paperwork. You can get a personalized offer in two to three minutes and funding in as little as two weeks.

With so many options for loan types and lenders out there, it’s important to do what’s best for you and your financial situation. Choosing Citizens means choosing over 100 years of experience and expertise in the financial industry — and a bank who is here to help you every step of the way.

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If you are taking on a renovation project, consolidating high-interest debt or you just want a worry-free getaway, a Citizens HELOC can help you right now. And our home equity specialists are here to help guide you.

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