How HELOC Repayment Works
A home equity line of credit (HELOC) does not work like a traditional mortgage or other types of installment loans, such as an auto loan. HELOCs have two distinct phases: a draw period and a repayment period.
The way HELOC payments are structured changes based on the phase of the loan, and those changes can stress your monthly budget if you are not expecting them.
The 5-Year Draw Period
At Ouachita Valley FCU, HELOCs include a 5-year draw period. During this time:
You can borrow funds as needed, up to your approved limit (borrowers can potentially qualify for up to $300,000)
The interest rate is variable
The minimum monthly payment is 1% of the balance owed or $100, whichever is greater
Because payments are based on how much of your limit you’ve used, they can change if:
You borrow more
You pay down principal
The variable interest rate adjusts
Example of HELOC Payments During the Draw Period
If you have a $20,000 balance:
1% of $20,000 is $200
Your minimum payment would be $200 (since that is greater than $100)
If your balance drops to $8,000:
1% of $8,000 is $80
Your minimum payment would be $100 (since that is the greater amount)
The minimum payment remains 1% of your balance (or $100) for the entire draw period, even if your rate changes. However, if a rate increase causes interest to accrue more quickly, your balance may decrease more slowly, and future minimum payments may gradually increase as a result.
Borrowers who only make the minimum payment may reduce principal slowly, especially if the rate rises.
What Happens When the Draw Period Ends
After the 5-year draw period ends:
You can no longer borrow additional funds
The account moves into the repayment phase
Payments shift from minimum-based amounts to structured principal-and-interest repayment, similar to a traditional installment loan
During the draw period, the minimum payment may feel manageable because it is based on a percentage of the balance. Once repayment begins, the remaining balance must be paid off over the remaining term, which often results in a higher monthly payment.
If you’ve prepared and planned, making room in your monthly budget for higher payments, HELOC repayment will likely remain manageable. Borrowers who weren’t ready for the shift can face some unwelcome budgetary pressure.
You Only Repay What You Borrow
It’s important to keep in mind that you are only responsible for repaying the amount you have actually borrowed. If your credit line is $200,000 but your balance is $50,000 at the end of the draw period, you only need to repay the $50,000. The unused portion of your line simply expires once the draw period closes.
The exact monthly payment will depend on the borrower’s remaining balance, interest rate, and repayment term, but the shift can be noticeable.
How Variable Rates Affect Both Phases
Ouachita Valley FCU’s HELOCs have a variable interest rate. That means:
The rate can change during the draw period
The rate can also change during repayment
Monthly payments may adjust when the rate changes
If rates increase, interest costs rise. If rates decrease, interest costs fall. HELOC borrowers should expect some movement over time, but there’s no guarantee on how much it will change or in which direction.
Doing your own research into rate trends and talking about the potential changes with a lending professional before opening a HELOC is a good idea.
Ways to Prepare for Payment Changes
Pay more than the minimum when possible. Extra principal payments during the draw period can reduce the balance that rolls into repayment.
Avoid borrowing the full credit line unless necessary. Leaving unused room provides flexibility. The less you owe when the repayment period begins, the more manageable the monthly payment will be.
Review your balance annually. Periodically checking how much will remain when the draw period ends can help you avoid unpleasant surprises.
Budget with repayment in mind. Consider what a higher principal-and-interest payment could look like and how your monthly budget may need to change to accommodate the transition.
HELOCs Can Be an Effective Way to Tap Into Home Equity, But Understanding Repayment Is Important
The elasticity of a line of credit, the attractive rates of a secured loan, and repayment flexibility can make HELOCs a useful tool for many homeowners in Northeast Louisiana.
If you would like to learn how much you may qualify for with a home equity line of credit, or discuss how repayment works, contact Ouachita Valley FCU at 318.387.4592.
