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HELOC Draw Period – what is it, and what does it mean to you?

At Santander, we get many questions on Home Equity Lines of Credit (or HELOCs). Since Home Equity Lines of Credit and how they work can be complicated, we’ve created this short guide on HELOCS and the HELOC draw period so that you can understand how they work

As always, confer with your financial professionals and advisors about how a HELOC will affect you. Taking out a HELOC is a big step, but it can be a great tool in planning for your future, if done wisely and after conducting the proper research.

HELOC Draw Period vs. HELOC Repayment Period

HELOCs are customarily used to assist homeowners in making large purchases for things like college expenses, home improvement, major appliances, and the like. Home Equity Lines of Credit are different from traditional Home Equity Loans in that a HELOC has two phases: HELOC Draw Period, and a HELOC Repayment Period.

  1. HELOC Draw Period- During the HELOC Draw Period, which is typically 10 years, borrowers can access funds from the line of credit up to the maximum approved limit, when they need them, as they need them. Funds are accessed by writing a check or transferring funds online into your checking account. During this time, payments will be either interest- only or principal and interest payments depending on which option you choose. Some Banks, like Santander, also offer the Fixed Rate Lock Option, which converts the balance into a fixed rate installment loan.
     
  2. HELOC Repayment Period– After the HELOC Draw Period ends, the account transitions into the repayment period. Accessto additional fundsis removed and repayment of the loan begins depending on the terms of the HELOC. Payments of principal and interest will be required in an amount sufficient to pay off the line by the end of the term.
     

What is a HELOC Draw Period?

A HELOC Draw Period is the time period that a borrower may draw funds from their line of credit. Not all Banks are the same, but the average term is 10 years.

During this equity draw time, the borrower is responsible for monthly payments based on the amount borrowed. The borrower can choose to make interest-only payments or payments of principal and interest. Interest rates are variable and are set at a percentage over or under the Prime Rate.

What is a HELOC "End of Draw" Period?

Once the Draw Period has expired (typically 10 years) and Repayment Period begins, you will no longer be able to access additional funds. Most Banks will send letters to customers well in advance of the end of draw date, advising them that draw privileges will soon end, so they can prepare. Monthly payments may also change as a result but not in all cases. If there is no balance on the end of draw date, the line will be closed permanently. During this time, we advise that you meet with your banker and explore the options you have once your draw period has ended or is ending. Your banker will tell you what exactly will happen when your HELOC shifts into its repayment phase and explore with you the options available to you. In addition to simply making monthly payments to pay down the balance, you may want to explore other methods of refinancing your HELOC

What is the Repayment Period?

The Repayment Period is the remainder of the HELOC’s term after the HELOC draw period has expired. During this time, monthly payments could increase substantially if you were paying interest-only in the Draw Period, as the principal and interest payments are now required. After the HELOC draw period, you will not be able to access any further funds from the HELOC and must make monthly payments as established in the agreement. When the Repayment Period begins is dependent on the terms provided in the HELOC Agreement that you signed with your bank.

What does this all mean to me as a homeowner?

HELOCS offer advantages that regular Home Equity Loans do not. A Loan provides funds in one lump sum with regular monthly payments of principal and interest until the loan is paid in full. HELOCs allow a customer the flexibility to access funds when they need them for both planned and unplanned expenses during the Draw Period. You will borrow, pay back and borrow again. A HELOC can provide the security of knowing that should an emergency arise, you are able to borrow when you need it without having to wait for a loan approval that may take weeks. Since HELOCs are secured by a lien on your home, interest rates will generally be lower than for unsecured debt, like credit cards, credit limit amounts will be higher and repayment terms more flexible. Interest may also be tax deductible when used to improve your home, but you should check with your tax advisor for guidance.

Where can I find more information on HELOCs and how they work?

 

You can check out these great sources of free and public information about HELOCs. Of course, we here at Santander would love to talk to you about how to use a HELOC as a smart option in your financial plan. Click to learn more.

Consumer Financial Protection Bureau – The CFPB has great educational information on HELOCS for borrowers.

Internal Revenue Service – This has current information on applicability of HELOC interest deductions

Federal Deposit Insurance Corporation – This document has the latest guidelines from the FDIC for 2018 about HELOCs, HELOC draw periods and other home equity credit lines.


 

Santander Bank does not provide financial, tax or legal advice and the information contained in this article does not constitute tax, legal or financial advice. Santander Bank does not make any claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in this article. Readers should consult their own attorneys or other tax advisors regarding any financial strategies mentioned in this article. These materials are for informational purposes only and do not necessarily reflect the views or endorsement of Santander Bank.

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