The three ways a HELOC gets repaid
You pay back a HELOC in stages set by your agreement: a draw period with a minimum payment, then either a repayment period of regular principal-and-interest payments or a single balloon payment of whatever is left. During the repayment period you can no longer borrow, and the outstanding principal is either due immediately in a balloon payment or repaid over the remaining term through higher monthly payments.[4]
| Stage | Minimum payment | Balance |
|---|---|---|
| Draw period, interest-only plan | The month's interest | Unchanged unless you pay more |
| Draw period, principal-plus-interest plan | Interest plus a slice of principal | Falls slowly; may not reach $0 |
| Repayment period | Level principal and interest | Falls to $0 by the end |
| Balloon plan at the end of the draw | The entire balance at once | Due in full |
The CFPB's booklet warns that even a plan whose minimum includes some principal may not repay the loan by the end of the term, and that with a balloon you must be ready to pay it by refinancing with the lender, getting a loan elsewhere or some other means.[1] Federal rules require the lender to disclose the length of the draw and repayment periods and how the minimum payment is figured before you open the line.[5]
Paying a HELOC off faster
Extra principal is the fastest way to shrink both the balance and the interest, because a HELOC's finance charge is figured on the outstanding balance. Many lenders let you pay more than the minimum at any time; some charge fees or penalties for it, so check your agreement first.[1] On $40,000 at 7.75% with 4 years of draw left and a 15-year repayment period:
| Extra per month | Paid off in | Total interest | Interest saved |
|---|---|---|---|
| $0 | 19 yr | $40,172 | $0 |
| $100 | 13 yr 9 mo | $26,641 | $13,531 |
| $200 | 10 yr 9 mo | $19,606 | $20,566 |
| $400 | 7 yr 4 mo | $12,333 | $27,839 |
| $800 | 4 yr 2 mo | $6,587 | $33,584 |
Put the extra toward principal from the start: during an interest-only draw, every dollar above the interest cuts the balance that the repayment payment will be based on.
When the draw period ends
The end of the draw is when most borrowers feel the cost of a HELOC: monthly payments are often significantly higher once you enter repayment.[3] On the minimum schedule above, the payment jumps from $258.33 of interest to $376.51 of principal and interest. Bank regulators note that some borrowers struggle with those higher payments, or with renewing the line after their finances change or the home loses value.[4] Your options at that point:
- Repay on schedule through the repayment period, or faster with extra payments.
- Ask the lender about a renewal, an extension of the draw or a modification; regulators expect lenders to underwrite these carefully and to offer sustainable workouts to borrowers in difficulty.[4]
- Refinance the balance into a fixed-rate home equity loan, a new line or a cash-out refinance; see can you refinance a HELOC.
- Pay it from a sale. If you sell the home you will probably have to pay off the line in full right away.[1]
Balloon plansIf your plan ends in a balloon and you cannot pay or refinance it, you could lose your home.[2] Find the words "balloon" and "repayment period" in your agreement now, years before the draw ends.
Worked example
- Today: $40,000 at 7.75%, 4 years left to draw. The interest-only minimum is $258.33.
- Paying $200 extra makes this month's payment $458.33. After 4 years the balance is $30,400 instead of $40,000.
- The repayment payment on that smaller balance is $286.15; keeping the $200 extra on top, the line is gone in 10 yr 9 mo from today.
- Interest: $19,606 with the extra payments vs. $40,172 on the minimum schedule.
To compare an interest-only draw with paying principal from the start, use the HELOC payment calculator; the interest-only HELOC page shows what the interest-only years cost in total, and the home equity loan vs. HELOC page compares a fixed payoff schedule.
Frequently asked questions
Can you pay off a HELOC early?
Usually yes. You can pay more than the minimum or pay the line off in full, but some lenders charge fees or penalties if you choose to pay more, so check the agreement.[1]
What happens if I only pay interest on my HELOC?
The balance stays the same for the whole draw period. When the draw ends you start repaying all of it, usually over a shorter period, so the payment rises sharply.
Do you have to pay off a HELOC when you sell your house?
Generally yes: the line is secured by the home, and the CFPB notes you will probably be required to pay it off in full when you sell.[1]
Is it better to pay off a HELOC or invest?
Paying down the line earns a certain return equal to its rate, after any tax effect. Compare that with what an investment might earn and the risk you would take; a variable-rate debt can also get more expensive.
Sources
- What you should know about home equity lines of credit (booklet)
- What You Should Know About Home Equity Lines of Credit (HELOC)
- What is a home equity line of credit (HELOC)?
- Risk Management of Home Equity Lines of Credit Approaching the End-of-Draw Periods (OCC Bulletin 2014-29)
- Regulation Z § 1026.40, Requirements for home equity plans