A home equity line of credit (HELOC) includes two main phases: the draw period and the repayment period. Combined, these two periods typically last up to 25 or 30 years.

The draw period is the first phase, and it differs in several significant ways from the second. If you’re considering applying for a HELOC, the difference between its draw period and its repayment period is essential to understand. Here’s how a HELOC draw period works and your repayment options when it comes to an end.

What is a draw period on a HELOC?

During its draw period, the HELOC works similarly to a credit card. It offers you an open line of credit. During the draw period, time, you can take out money up to the credit limit as often as you’d like until the draw period ends. You do not have to make payments toward the principal during the draw period: Typically, you are only required to pay interest, at a fluctuating rate, on the money you’ve withdrawn — though you can repay the principal if you want to. With some HELOCs, the lender may charge you minimum monthly payments.

How long does the draw period on a HELOC typically last?

Typically, a HELOC’s draw period lasts between five and 10 years. Once the draw period is over, the HELOC transitions into the repayment period. You cannot borrow against the line of credit any longer, and must start paying back the borrowed sum. The repayment period begins immediately after the draw period ends.

How does a HELOC draw period work?

During the draw period, you’re given a set line amount to borrow against, based on the amount of equity in your home. You can borrow up to the limit, pay it back and then borrow more money as many times as you want until the draw period comes to a close.

This set-up makes HELOCs an excellent resource for projects with variable and uncertain costs and/or long time frames, such as home improvements. Let’s say you establish a $30,000 line of credit. You take $20,000 out of your HELOC at a 7 percent interest rate to remodel your kitchen at the beginning of your draw period. During the draw period, you will only have to pay the monthly interest on the amount you borrow, or $116.67 in this scenario.

But what if your kitchen remodel goes over budget? No problem. You can borrow more money up to the credit limit if you are still in your draw period. If you borrow another $5,000, for example, your minimum monthly payments will rise to $145.83.

Contractors typically get paid in installments during long projects. So here’s another way the HELOC can be advantageous. You can withdraw enough for the first payment — say, one-fourth of the overall $20,000 budgeted cost — before the job begins. When the next installment comes due, around the project’s halfway point, you borrow enough to cover that. And so on. But you’ll only have to pay interest on the amounts you borrow, as you borrow them. In contrast, if you took out a regular lump-sum loan, you’d immediately have to start repaying interest and principal on the entire amount ($30,000 in our scenario).

What is a HELOC repayment period?

After the HELOC draw period is over, you enter the HELOC repayment period.

In the repayment period, your HELOC functions more like a regular loan. You’ll make monthly payments that will include both principal and interest. These payments are scheduled to pay off your HELOC’s interest and principal by the end of the HELOC’s term.

Because you’re only charged for your outstanding balance at the end of your draw period, your monthly repayment amount depends on how much you borrow and your HELOC’s interest rate. Remember that HELOCs typically have variable rates, so your payments could increase if interest rates rise over the life of the loan.

How long does a HELOC repayment period typically last?

HELOC repayment periods vary based on the terms of your agreement but typically last 10 to 20 years. During this time, you will not be able to make additional draws.

What to do before your HELOC draw period ends

As your HELOC nears the end of its draw period, take stock of your loan to fully prepare for what comes next. Jon Giles, senior vice president of consumer direct lending and real estate secured lending at TD Bank, recommends reaching out to your lender before your HELOC draw period ends with the following questions:

• Will there be a change in my interest rate during repayment?
• Will my repayment interest rate be fixed or variable?
• What is the change in payment per month?

Most lenders notify customers at least six months before the end of their draw period. However, if you’re unsure of when the loan will move into repayment, contact your lender’s service department.

Alternative repayment options

You have several options for refinancing or retiring your HELOC before the draw period ends. As you consider these options, remember there is no one right approach. “Which option is best for you depends on your unique situation. You can work with your lender to explore your options and determine the solution that best meets your needs,” said Michelle McLellan, senior product management executive at Bank of America.

If you qualify for another HELOC with a low-APR introductory period, you can refinance to extend your draw period while retaining low monthly payments. However, if your HELOC is a variable-rate loan, you may be worried about the fluctuating payment amounts from month to month. Refinancing to a fixed-rate HELOC could give you a fixed APR on the amount owed while allowing you to draw on the remaining funds during the draw period.

Another avenue towards a fixed APR is to refinance your HELOC into a traditional home equity loan. Instead of extending your draw period, a home equity loan gives you a lump sum of cash which you can make fixed payments on until the loan is paid off. Since you start paying off the interest and principal immediately with a home equity loan, your monthly payments may be higher than the interest-only payments during your HELOC draw period. On the other hand, you can plan and budget more accurately knowing the exact amount you will pay each month.

Another option is to refinance your HELOC and primary mortgage simultaneously into one new mortgage. This process can be complicated, but will also get you one easy-to-understand fixed mortgage payment. If you choose this route, make sure to research closing costs and current mortgage rates.

Finally, if you have the cash available, you can repay your HELOC entirely before you enter the repayment period or lower the balance significantly by applying additional amounts toward the principal.

Final word on HELOC draw periods

A HELOC draw period is the first stage of a home equity line of credit, during which you can borrow money up to a certain amount while only making interest payments on the amount you borrow. It typically lasts five to 10 years. Once the draw period ends, you can no longer take cash out, and the repayment period begins.

During the repayment period, you must make payments on the interest and principal until the loan is paid off. If you can’t afford the change in monthly payments, need to borrow more money or don’t like having a variable interest rate, there are plenty of alternatives to explore. Always shop around — not just for products, but lenders, comparing rates, fees and terms. It can save you a surprising amount