When the interest-only period of a home equity line of credit agreement expires, you can no longer actively use the line and must repay the outstanding balance. HELOCs are a type of mortgage product, and the lender releases the lien on your home only when you have paid off the entire balance.
When you've paid the interest portion of a HELOC, you can no longer draw on the line of credit. Your lender converts the remaining balance to an amortizing term loan.
The Basics of a HELOC
When you take out a HELOC, your lender determines a line limit based upon the available equity in your home and your debt-to-income ratio. You must have sufficient income to pay your existing monthly debts as well as the proposed HELOC payments. HELOCs, like other mortgages, have a term time frame, which normally lasts for between 20 and 35 years. However, the lenders break the term into two distinct phases: the interest-only term and the repayment term.
Using a HELOC
You can use funds in a HELOC for any legal purpose. Some people establish a HELOC to fund home renovations, while others establish the lines just to have money available for unexpected emergencies. During the interest-only term, your lender sends you a monthly statement detailing recent account activity. You must make a minimum monthly payment to cover the interest, but if you prefer you can also make an additional payment to reduce the principal. You can pay down the balance and then draw on the funds again multiple times.
Repayment of a HELOC
The interest-only period of a HELOC normally lasts for between 10 and 20 years, after which you can no longer draw on the line. Your bank converts any remaining balance into an amortizing term loan. This means the lender divides the outstanding principal and interest into roughly equal payments that last for a period of 10 or 15 years. The payments are carefully structured to ensure that after you make the last payment no balance remains on the loan.
Other HELOC Considerations
Lenders can end the initial phase of your HELOC prematurely if your home loses value or if your credit score falls. Banks can freeze your HELOC or reduce the line amount to prevent you from accessing untapped funds. You can contest a line reduction or freeze, and if you can prove that your property value has not fallen or that your credit score remains high, the bank must reinstate the line. Although the bank can terminate the initial usage period of the line prematurely, you can continue to make interest-only payments until the loan amortizes on the date stated in the original HELOC agreement.
- The Federal Reserve Board: What You Should Know About Home Equity Lines of Credit
- Federal Trade Commission: Home Equity Loans and Credit Lines
- PenFed. "Home Equity Line of Credit." Accessed June 12, 2020.
- PenFed. "Membership Disclosures." Accessed June 12, 2020.
- U.S. Bank. "Home equity FAQs." Accessed June 12, 2020.
- U.S. Bank. "Home Equity Line of Credit (HELOC)." Accessed June 12, 2020.
- Bank of America. "Home Equity Assumptions." Accessed June 12, 2020.
- Connexus Credit Union. "Home Equity Loans & Lines of Credit." Accessed June 12, 2020.
- Connexus Credit Union. "Connexus Membership." Accessed June 12, 2020.
- Bank of the West. "Important Terms: Equity Choice Line of Credit." Accessed June 12, 2020.
- Bank of the West. "Home Equity." Accessed June 12, 2020.
- TD Bank. "Home Equity Line of Credit Rates." Accessed June 12, 2020.
- TD Bank. "Home Equity Line of Credit." Accessed June 12, 2020.
- IRS. "Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 2." Accessed June 12, 2020.