How Do HELOC Payments Work?

If you recently opened a home equity line of credit or are thinking about getting a HELOC, it’s important to understand the ins and outs of paying your monthly HELOC bill. A HELOC is different from a mortgage or home equity loan, though all three use your home as collateral.

With a HELOC, you will likely owe some money each month if you are actively drawing on your line of credit. But the amount owed will change month to month. Learning the basics of managing your HELOC payments and how paying back a HELOC works can help you minimize costs, safeguard your credit score, and protect your home from foreclosure.

What Determines Your Monthly HELOC Payment

Your monthly HELOC payment will likely change significantly over the life of your line of credit. There are three forces that determine your monthly amount due: the amount you’ve withdrawn from your credit line; your interest rate; and which phase of the HELOC you happen to be in (more on the intricacies of the latter below).

The amount you’ve withdrawn from your line of credit will change over the life of the HELOC. That’s the beauty of a HELOC: You don’t have to borrow a lump sum all at once. Instead, you can withdraw smaller amounts as needed, up to the limit set by your lender.

As for the interest rate, most HELOCs have variable rates. There may be a span of time at the outset of your HELOC when you benefit from a low introductory rate. (Also, HELOC rates are typically lower than those for both credit cards and personal loans.) After the introductory period spelled out in your HELOC agreement, your rate will rise (or fall) depending on the current market. HELOC rates usually follow the prime rate, which is guided by the Federal Funds Rate set by the Federal Reserve.

The third factor is which phase of the HELOC you are currently in: the draw period or the repayment period. Let’s examine each of these more closely to see how do HELOC payments work and how do you pay off a HELOC.

HELOC Payments During the Draw Period

Unlike home equity loans, which are lump-sum loans with a consistent monthly payment amount over five to 20 years, HELOCs have two distinct payment phases. The draw period on a HELOC is the first phase and typically lasts from three to 10 years. During this time, you can withdraw from the line of credit as needed. You might pay $17,000 to a roofing contractor one month and then spend $1,800 to replace a garage door the following month.

Most lenders allow borrowers to make only interest payments during the draw phase. So your monthly payment will depend on how much you have withdrawn against your credit line and what your current interest rate is. As noted above, most HELOCs have variable interest rates.

This means that the two factors that determine your monthly HELOC payment during the draw phase can both change from month to month.

HELOC Payments During the Repayment Period

After your draw phase ends, you’ll face the next phase of HELOC management: the repayment period. How does paying back a HELOC work during this phase? Once the draw period ends, you can no longer use your line of credit. In the repayment period, which could be up to 30 years, you’ll make monthly payments based on whatever amount you owed when your draw phase ended.

Again, your interest rate may rise or fall. The frequency of change and extent to which it can go up or down will be spelled out in your HELOC agreement, so the amount you owe shouldn’t be entirely a surprise. But some HELOC borrowers still experience shock when the principal-plus-interest payment phase of their HELOC kicks in.

If you want to get a feel for what your payments might cost you during this phase, run the numbers with a HELOC repayment calculator. But bear in mind your real-world number will be affected by your variable rate.

Recommended: Understanding the HELOC Closing Process

Tips for Managing HELOC Payments

For extra credit — and cost savings — you’ll want to learn more about how HELOC interest is calculated. You might be able to save money on interest if you make purchases toward the end of your HELOC billing cycle, make payments early (before they are actually due), make extra payments toward the principal, or some combination of all three.

Finally, explore paying off a HELOC early if you have extra cash on hand. Not all lenders charge an early-payoff fee, but even if a fee is part of your HELOC agreement, you might save more on interest than you will pay in fees.

Interest-Only vs Principal-and-Interest Payments

You can minimize stress while repaying your HELOC by keeping tabs on two things: when your draw (interest-only) phase ends, and what size HELOC balance you’re running up. To avoid missing payments, be prepared for your monthly costs to increase significantly when the draw phase ends and the principal-plus-interest repayment phase begins.

If you are someone who likes to put bills on autopay, you’ll want to make sure you always have enough funds in your account to cover the changing HELOC monthly payment.

What Happens If You Miss a HELOC Payment?

Missing a HELOC payment can have significant negative fallout, including an effect on your credit score. You might enjoy a grace period of a week or two, during which you should make the payment. If you don’t pay by the end of the grace period, some lenders charge a late fee of up to $50. If you can’t make the payment and the debt stacks up, you’ll see a noticeable dip in your credit score after 30 days. This could impair your ability to get credit for other purposes, such as a personal loan or a mortgage refinance.

If your overdue payment hits the 60- to 90-day mark, your lender may freeze your line of credit so that you can’t use it. If nonpayment persists, the lender can begin the process of foreclosing on your home.

The Takeaway

Understanding how do you pay back a HELOC is an important part of the HELOC process, whether you already have a home equity line of credit or you’re considering borrowing against your equity with a HELOC. As you explore potential lenders, look at interest rates but also fees and whether a lender has a prepayment penalty. Make sure you understand the HELOC’s draw and repayment phase timeline before you sign on.

SoFi now offers flexible HELOC options to turn your home equity into cash. Access up to 85% of your home equity, or $750,000, to finance home improvements or consolidate debt. Competitive interest rates and repayment terms up to 20 years could result in lower monthly payments versus other loans. And the online application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi.

FAQ

Can you pay off a HELOC early without a penalty?

You may be able to avoid a penalty when paying off a home equity line of credit (HELOC) early. Some lenders charge a penalty for an early payoff on HELOC and others do not, while certain lenders charge a penalty only if the HELOC is paid off in the first few years of its lifespan. Consult your HELOC agreement or call your lender. Don’t be immediately deterred by a penalty as you think about how you pay off a HELOC: Do the math to see if your penalty is less than you would pay in interest over the long haul, and let overall costs drive your decision.

Does making HELOC payments help build your credit score?

Making on-time HELOC payments could help foster a stronger credit score in one or both of these ways: Payment history is a component of your credit score that takes into consideration whether you met deadlines. And if you are paying down the principal balance owed on your HELOC and reducing the overall amount you owe on credit accounts, this might also have a helpful effect on your score.

Can you switch a HELOC to fixed-rate payments?

Some HELOC lenders will allow borrowers to convert some or all of their HELOC balance to a fixed-rate loan, which freezes the interest rate and allows for predictable monthly payments during the repayment period. The interest rate on a fixed-rate loan is typically higher than that on a variable-rate one, but some borrowers like to convert to a fixed rate for peace of mind.

What happens to your HELOC payment if interest rates rise?

If you have a variable-rate HELOC, the most common kind, your HELOC payment may go up if interest rates rise. Whether the payment rises will depend on your current rate, where you are in the HELOC’s timeline, and what your HELOC agreement specifies in terms of the frequency and size of rate increases (the number of percentage points).

Can you pay more than the minimum HELOC payment?

It’s possible to pay more than you owe on your HELOC during both the draw and repayment phases of the HELOC’s term. Some borrowers pay down the principal during the draw phase so that they can use the full credit line again. And during the repayment period, borrowers might pay an extra amount toward the principal to reduce the amount of time it takes to repay what they have borrowed and potentially save on interest costs.

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Photo credit: iStock/Hiraman

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