The money from your HELOC can be used to pay off other higher-interest debt, make home improvements , remodel and more. This draw period typically lasts between five and 10 years. Once the draw period is over, you cannot borrow from the loan again without refinancing it first. At this point, the loan converts to a repayment schedule, during which both principal and interest will be due every month.
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. Know when the draw period ends to adequately prepare yourself for the next phase.
Keeping track of your draw period can also help you determine whether you want to refinance the HELOC or begin putting money into savings to use toward paying down the principal during the repayment period. However, if your HELOC balance is already at zero at the end of the draw period, your account will typically close automatically, McLellan says. Knowing the full amount of the principal and interest payment before you enter the repayment phase helps you avoid surprises.
Principal and interest payments can cause a significant change to a budget, and these payments will last anywhere from 10 to 20 years.
Or, you may want to refinance into a fixed-rate loan for greater payment stability. Jon Giles, senior vice president of home equity at TD Bank, recommends reaching out to your lender well in advance of the repayment phase and asking the following questions:. Most lenders begin notifying customers at least six months before the end of their draw period, Giles adds. As you consider these options, keep in mind that there is no one right approach, McLellan says.
You can work with your lender to explore your options and determine the solution that best meets your needs. This will help keep your payments down and give you more time before the payments on your principal are due. 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 still allowing you to draw on the remaining funds during the draw period.
Similar to a HELOC, a home equity loan allows you to borrow money based on the equity you have in your home. This option gives you a fixed APR, fixed payments and a set repayment timeline. Additionally, the Internal Revenue Service allows people in certain income brackets to deduct mortgage interest payments from their taxable income. Tax savings make HELOCs more attractive than other loan types such as automobile loans that do not have tax benefits.
When you increase a HELOC, your interest rate for all future balances changes from your old rate to the rate offered at the time of the increase.
Line amounts that exceed 80 percent of the home's value have higher rates than loans with lower loan-to-value ratios.
If you have an existing balance on a HELOC, you continue to pay the rate in effect at the time you used the money. Purchases will be qualified based on the day the purchase posts to your new account.
Purchases include any payments made using your debit card number but do not include ATM transactions such as withdrawals. Students under age 24 are eligible to have this fee waived while enrolled in high school, college or a vocational program. When you are a Bank of America Preferred Rewards client waiver applies to first 4 checking and savings accounts.
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