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By Jamie Smith
With an Alliant Home Equity Line of Credit (HELOC), homeowners who have equity in their home can borrow against that equity for home improvement projects or other financial needs. Your home's equity is the amount of your home’s value that you own outright. You can calculate your equity by taking the current value of your home and subtracting what you owe on it from your mortgage loan(s).
Homeowners considering a home equity line of credit commonly have questions about the two distinct parts of a HELOC: the draw and repayment periods. Here’s what you need to know about each of them.
Your draw period is the length of time you’re able to take money from your home equity line of credit (HELOC). It will last for several years, typically 10 years max. For example, you could have a 10-year draw on a HELOC with a 30-year term. You can take out money for 10 years, but you have a long time (30 years) to make payments back.
During the draw period, you can borrow money up to your maximum credit limit. You do not need to borrow the entire amount or withdraw it all at once. Maybe you need $10,000 for a project now, and you might need another $20,000 in a couple of years.
Depending on the lender, spending money on a HELOC is typically done via checks or on a credit card. However, it's much different than a traditional credit card. Your home's equity secures your HELOC, whereas a credit card is an unsecured debt. Interest rates are also lower with a home equity line of credit versus a standard credit card.
Once your draw period ends, you can no longer borrow funds from your HELOC. This date is when your repayment period will begin. You will typically receive notice that your draw period is coming to a close. That way, if you want to withdraw any more money, you can do so before the deadline.
When your home equity line of credit converts to the repayment period, you will start repaying both principal (the amount you borrowed) and interest. You are only making payments on what you borrowed, not your entire line of credit. For example, if you withdrew a total of $200,000 during your draw period, you’ll repay that amount of principal plus the interest on $200,000, even if your line of credit was for $700,000.
This is one difference between a HELOC and a home equity loan. With a traditional home equity loan, if you receive a $700,000 loan, that is the amount of principal you repay. It doesn't matter if you only used $100,000 of that amount.
The duration of your repayment period on a home equity line of credit will also vary. In most cases, it lasts between 10 and 20 years. Estimating a repayment amount requires looking at the specifics of your HELOC since it's based on how much you withdrew.
While you can draw what you need with a HELOC, it's important to understand your loan's terms before applying. Some lenders may have a minimum draw amount, a shorter draw period, or different requirements on when you start repaying. A 10-year draw period may not mean you get to just withdraw funds for the 10 years without any payments.
If you have an interest-only HELOC, your payments will be much smaller during the draw period. That is because you are only paying interest at the start. Eventually, the principal (the amount you borrowed) and interest will all be due. With an interest-only HELOC, your payments will increase when the repayment period starts. You should understand your total payments once the repayment period commences so you aren't surprised and can make plans.
With higher payments due once the repayment period starts, you might be wondering who would want an interest-only HELOC. Typically self-employed people or those with varying monthly incomes prefer the interest-only option. Someone who expects to be earning significantly more in a few years might also opt for an interest-only HELOC.
You need to know when your draw period expires because you want to be ready for the repayment phase. You want time to help ensure you have all the funds you need and can plan for any future expenses that may come up. You may also want to start putting money aside in savings to prepare for the repayment phase when your payments increase. If possible, you may want to start paying down principal before the repayment period begins.
Another reason to track your draw period is to decide what to do when it ends. Understanding what you owe when the repayment phase begins can help you determine whether you want to look at additional refinancing options.
Well before your draw period ends, you should contact your home equity line of credit lender to discuss specifics. Potential questions you want to ask include:
If you are unsure when your draw period is over, it's OK to contact your lender and ask. You don't want to be caught by surprise. It is better to reach out and verify the date.
If you are concerned about the amount of money that your payments will increase once you hit the repayment period, you aren't alone. That is why there are different options you might be able to consider before the draw period ends. Here's a look at the most common ones.
You can consider refinancing into a new HELOC with a special introductory low interest rate. You can take advantage of that special rate to keep your payments down, giving you additional time before principal payments are due. The added bonus is you can continue to draw from your HELOC if needed.
If you have additional cash, you can pay off your home equity line of credit in full or at least lower the balance by applying a large sum to the principal. You’ll want to ensure the payment is credited against the principal, otherwise all you accomplish is to pay down some interest while your underlying balance stays the same.
Another possible option is to refinance your home equity line of credit into a traditional home equity loan. This will provide you with a fixed APR and set payments.
An Alliant HELOC could help you get the funds you need when you need it. Pay for a home renovation, vacation home and more.
Want to read more about home equity lines of credit? Check out these helpful articles on HELOCs and other financial options:
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