HELOC Draw Period

A home equity line of credit (HELOC) draw period is the period of time after a HELOC has been opened and before the repayment period begins. HELOC terms vary, and a HELOC can be used in many ways. For most HELOCs, the only payments due during the draw period are the interest payments with no payments due towards the principal.  

Key Takeaways

  • The HELOC draw period is the time frame during which you draw from the credit line that is based on the equity in your home. 
  • Most payments during the draw period are interest-only payments.
  • When the draw period is over, the payments due on a HELOC will skyrocket if no payments were made to the principal during the draw period. 

HELOC Overview

Both a HELOC and a home equity loan are based on the equity you have in your home at the time you get them. To calculate your home's equity, you would get an estimate of the current value of your home. Next, subtract the current balance on your mortgage and any other existing loans on your home. 

Warning

Unlike other forms of unsecured debt, like personal loans or credit cards, HELOCs are secured using your home as collateral, meaning that you are at risk of losing your home to foreclosure if you can’t repay your HELOC.

You cannot take out a HELOC or home equity loan for more than 85% of the equity in your home. Less-optimal borrowers, such as those with poor credit scores or high debt-to-income ratios, would be able to access less than 85% of their home equity. For example, if you have a home valued at $500,000 with a mortgage balance of $300,000, you would have $200,000 in equity and be able to take out a HELOC or home equity loan for up to $170,000, depending on eligibility.

A HELOC and a home equity loan differ in how you can use the equity in your home and how you will have to pay it back. A home equity loan gives you a single lump-sum payment of your chosen amount, which you repay in equal monthly payments over a set period of time. 

A HELOC gives you access to a credit line up to your set limit. You can use as much or as little of this credit line as you would like during the draw period. You are obligated to make interest payments only on the balance until the repayment period begins. At that time, you will have to make payments on the interest as well as the principal of the credit you used.

Deducting Interest

The interest paid on a home equity line of credit (HELOC) used to be tax-deductible, but the law changed with the Tax Cuts and Jobs Act of 2017. Now HELOC interest can only be deducted on the amount of the HELOC used to “buy, build, or substantially improve” a home.

Additionally, the new standard deduction was increased to $12,950 for single filers and $25,900 for married couples filing jointly in 2022, up from $12,550 and $25,100, respectively, in 2021, which could make itemizing in order to take a deduction on HELOC interest impractical for most filers.

HELOC Draw Period

The HELOC draw period will vary in length based on the terms of each individual HELOC. Generally, a draw period is between five and 15 years, with 10 being the most common. The repayment period is usually longer: between 10 and 20 years.

During the draw period, up to the limit on the HELOC may be spent. The only payments due on most HELOCs during the draw period are minimum payments that pay the interest due on the balance only.

It is possible for borrowers to continuously borrow up to the limit on their HELOC and pay it off repeatedly. This strategy is popular with real estate investors, who will use a HELOC to buy and rehab additional properties and then repay the HELOC so they can buy more properties without taking out additional loans.

Any additional principal payments made during the draw period on a HELOC will reduce the payments due during the repayment period of the HELOC. During the draw period, your online account through your HELOC servicer should show you estimates of what your monthly payment will be during the repayment period.

What Happens at the End of the HELOC Draw Period?

Once the draw period on a HELOC is reached, no more money may be spent on the credit line. Payments due will increase significantly to include payments toward the principal so that the principal and interest are paid off by the end of the HELOC repayment period. 

Many borrowers aren’t prepared for these payments to increase, so they will open new lines of debt to pay off the existing HELOC. This is known as debt reloading and can lead to a vicious cycle that is hard to break. You can prepare for your HELOC repayment period and avoid debt reloading by making payments toward the principal on your HELOC during your draw period. Before the draw period ends, make sure that there is room in your budget to repay your HELOC when your payments spike. 

Rolling a HELOC into a new HELOC, home equity loan, or cash-out refinance can be an attractive option but doing so reduces the equity you have in your home, which can quickly cause you to be underwater on your mortgage. Make sure that the money you use during your HELOC draw period is spent on things that are actually needed.

The Bottom Line

Make sure that you know the terms of any HELOC before signing up for one. Be aware of the length of your draw and repayment periods, and make sure that there are no prepayment penalties if you choose to make additional payments toward principal during your draw period. 

During your draw period, log in regularly to see what your payments will be during the repayment period and budget accordingly so that you will be able to afford the increase. Before taking out any loans or credit lines that use your home as collateral, consider the ramifications if you cannot afford to pay them back. 

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  1. Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or 'Junior Lien'?" Accessed Jan. 4, 2022.

  2. Internal Revenue Service. "Interest on Home Equity Loans Often Still Deductible Under New Law." Accessed Jan. 4, 2022.

  3. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022." Accessed Jan. 4, 2022.