What happens to a HELOC after 10 years?

In today’s high-rate, inflationary climate, many borrowers are rethinking their financing strategies — and for homeowners, home equity lines of credit (HELOCs) have quickly emerged as one of the most attractive options. With the average HELOC interest rate hovering around 7.95%, these are often significantly cheaper than other popular forms of borrowing. Credit card rates are averaging close to 22% right now, after all, and personal loan rates have climbed to more than 12% on average. That interest rate gap has made HELOCs an especially appealing option for borrowers looking to consolidate debt, pay for home improvements or cover major expenses.

But low rates aren’t the only reason that interest in HELOCs is significant. The average American homeowner also holds over $300,000 in home equity currently, which is a sizable pool of funds to tap into without selling their home. And, unlike a home equity loan, which gives you a lump sum of cash with a fixed interest rate and repayment schedule, a HELOC gives you more flexibility because it acts more like a credit card. You borrow what you need, when you need it, up to a set limit during the draw period.

That flexibility, however, can come with a catch. The way HELOCs are structured results in distinct phases that can create confusion about what happens after certain milestones, one of which occurs after a decade for most HELOCs. So, what exactly happens to a HELOC after 10 years? That’s what we’ll examine below.

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What happens to a HELOC after 10 years?

Most HELOCs are structured with two primary phases: the draw period and the repayment period. The draw period typically lasts 10 years, during which borrowers can access funds up to their approved credit limit as needed. During this phase, borrowers usually have the option to make interest-only payments on the amount they’ve borrowed, though some lenders may require small principal payments as well.

When the 10-year mark arrives, the HELOC transitions from the draw period to the repayment period. This transition triggers, in part, the following changes:

• Access to funds ends: You can no longer borrow additional money from your HELOC. The line of credit effectively closes, and you begin the process of paying back what you’ve borrowed.
• Payment structure changes: Your monthly payments will increase, often substantially. During the repayment period, which typically lasts 10 to 20 years, you must pay both the principal and interest. This means your monthly payment could be significantly higher than what you paid during the draw period.
• Interest rate considerations: If you have a variable-rate HELOC (which most are), your interest rate can continue to fluctuate based on market conditions, potentially further increasing your monthly payments if rates rise.
• Amortization begins: Your loan enters full amortization, meaning each payment reduces your principal balance by a specific amount, with the loan scheduled to be completely paid off by the end of the repayment term.

In other words, the end of the draw period represents a critical juncture for HELOC borrowers, as it often coincides with a significant payment increase that must be factored into household budgets.

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How to prepare for the end of your HELOC draw period

To avoid unnecessary financial strain when your HELOC transitions to the repayment phase, consider using these strategies to prepare:

Start making principal payments early. Your HELOC may only require interest payments during the draw period, but voluntarily paying down some principal each month will reduce the balance you’ll need to repay later and help you adjust to higher payment amounts gradually.

Calculate your future payments. Ask your lender to provide an estimate of what your monthly payments will be during the repayment period. This allows you to prepare your budget accordingly and determine if those payments will be manageable.

Consider refinancing options. If you’re concerned about handling the increased payments, explore refinancing your HELOC before the draw period ends. Options include:

Build your emergency fund. Strengthening your financial reserves during the draw period creates a safety net that can help you manage the transition to higher HELOC payments.

Pay down high-rate debt. If you have outstanding credit card balances or other high-rate debt, consider using your HELOC funds to consolidate these before your draw period ends, potentially improving your overall financial position.

The bottom line

HELOCs are a powerful borrowing tool, especially right now, when interest rates on other types of loans are so much higher. But they’re not a forever source of flexible funding. After 10 years, the draw period ends and repayment begins, bringing with it significantly higher monthly costs.

If you’re approaching the end of your HELOC draw period, now is the time to assess your options and take action. With a little planning and proactive decision-making, you can avoid surprises and make the most of your home equity without letting it become a financial burden in the future.