What Happens After the Initial Draw Period?

If you’re thinking of getting a HELOC, you may have heard the term, “draw period.” And you may know what it is. But, what happens after the draw period? We’ll get into that below. But first, a quick refresher.

A home equity line of credit is a valuable tool that can impact your financial outlook for the better. Do you wish your mortgage was paid off or that you had more payment flexibility? A HELOC can help you take control of the equity you have in your home and put it good use. For many that means paying off your home and living debt free. It could allow them to be more generous, finance a big home improvement project, travel more, save for education, or create a financial safety net to give them greater peace of mind.

Whatever your priorities, a HELOC may help you achieve them faster than you ever thought possible.

The terms of a HELOC always include a specific draw period, a time where you can use your entire income to pay down your debt while giving you access to the equity in your home. It’s part of our HELOC strategy to help you pay down your mortgage faster. In most cases, the draw period lasts either 5 or 10 years depending on your lender. You can borrow as much as you like (up to the limit your HELOC allows). And during this time, you can make interest-only payments on what you draw from the account. However, you’re best served by making the largest payments possible.

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What happens after the draw period?

The end of the draw period is followed by the repayment period, which usually lasts 10 to 20 years. Over the repayment period, the borrower must pay off the principal balance of the HELOC, along with any interest incurred. During this time, the HELOC is deposit-only (like a mortgage) and cannot be used as a source of funds. That’s what happens after the draw period.

Most repayment periods are structured into monthly payments, although some options include a balloon payment at the end of the draw period where the total balance is due at once. One benefit of most HELOCs is that they don’t carry prepayment penalties like other fixed second mortgages.

For individuals who follow the first-lien HELOC strategy we recommend, you’ll pay off your mortgage immediately, then diligently pay down the HELOC balance during the draw period, potentially saving you thousands of dollars over the course of the loan. That said, if you reach the last year of your draw period, it’s important to talk with your lender to assess your current financial standing and how much you have left to pay on your HELOC. At that time, you can evaluate whether to roll the balance into a new HELOC or find another financial product that’s right for you.

Are you cash-flow positive, have equity in your home, and have good financial discipline? Refinancing your current mortgage in to a first lien HELOC could work for you. For more information, fill out our simple survey. It will give Control Your Equity financial professionals the details they need to effectively help you review your options. You can also download this free resource, Take Control of Your Equity. It dives deep into the details of why our HELOC strategy works – and who can benefit from it.