How Do You Pay Back a HELOC?

A home equity line of credit (HELOC) loan allows homeowners to borrow against their home’s equity. With a HELOC, the loan operates like a credit card, allowing you to use as much or as little as you need over time. You can use the line of credit, repay what you borrow, and then borrow again. A HELOC can be used for just about anything you need over the lifetime of the loan.

Triad Bank offers HELOCs designed to meet your needs and support you through repayment. Read on to learn how to repay a HELOC, including repayment options, tips on how to borrow responsibly, what a HELOC can be used for, and how to make the most of this versatile lending option. 

How Does HELOC Repayment Work?

HELOCs are interest only and do not have a scheduled payment like your home loan. The sooner you repay the loan, the less you pay in finance charges. You can pay off your HELOC early, though some have prepayment penalties. The terms and conditions of a HELOC can change from one lender to the next. You’ll need to read through and understand those conditions, including your interest rate, how much your monthly payment is, and how long the HELOC is available to you.

Several ways a HELOC is different from other types of loans 

As a revolving type of credit line, your lender sets the terms and conditions, including the credit limit or the amount you can borrow. This is never more than your home’s available equity (and generally slightly less than). The amount you owe with each payment differs based on the amount of the loan you’re actually using. Here’s an example:

If you are provided a $25,000 HELOC, that means you have up to $25,000 to use. You want to use it to upgrade your home’s roof, which costs you $11,000. Your monthly payment is based on the $11,000 you owe the lender. If you took out the full amount when opening your HELOC, your monthly payment is based on that amount. Any time you use your HELOC, the balance goes up, as does your monthly payment.

What’s very different about a HELOC is that you can borrow as much as you need, start paying it back, and then borrow more throughout the lifetime of a loan. That’s different from any other secured mortgage loan.

Understanding repayment is crucial, and a few more components make it unique compared to other types of loans.

Draw period vs. repayment period?

One factor that is different is the draw period, which is the period of time the HELOC is active (most range from 10 to 15 years.) During that time, you can use as much or as little of the available credit limit as you like, paying it back over time. The payments you make during the draw period are interest-only payments. That means you’re not paying off the entire loan amount you borrowed, though some lenders also let you pay down the principal balance.

The repayment period comes after the draw period ends. It gives you a set number of years from the end of the draw period to repay the borrowed amount. The repayment period is usually around 20 years. In many situations, the interest rate becomes a fixed rate during the repayment period, giving you the same monthly payment to make month after month until you pay off the loan. That is made up of both principal and interest.

The Repayment Process 

Like any personal loan, once you begin borrowing and using the funds available, you must make a HELOC payment. Like credit card debt, the sooner you repay what you borrow, the less you pay over time. Here are a few key things to know about how to repay a HELOC loan.

Make monthly payments

Your HELOC lender will provide you with information about your monthly payment based on the amount of money you use from your loan during the HELOC draw period. Using the same example above, the borrower has $25,000 they can use as a credit line. They use $11,000 of that initially.

Monthly payments are based on the HELOC funds being used. During the HELOC draw period, you make interest-only payments. That means the monthly payment is lower and tends to be more affordable. If applicable, you can also pay towards the HELOC balance, depending on any fees the lender charges.

Understanding interest payments

With this loan option, you are only making monthly payments to pay down the interest on your loan. That means the amount you’re actually borrowing – called the principal, is the last portion to be paid down (in this case, you’ll work on paying off the INTEREST only on the $11,000 while the $11,000 remains present until repayment begins.)

HELOC interest is applied from the date you begin using the loan until you pay it off in full. HELOC interest rates tend to be far better than the average personal loan or most credit cards, which is why these are such beneficial loans to consider.

Exploring repayment options

Your goal should always be to pay off the amount of money you borrow from the HELOC loan as soon as possible to lower the cost of borrowing funds. Even though HELOC interest is often lower, using this credit line still costs money. Consider these tips to help you to improve your costs.

Make payments on time every time 

A late payment on a HELOC loan will hurt your credit score. The lender will report your loan to the credit bureaus, which means it will appear on your credit report. If you make payments on time, you can use a HELOC loan to build a strong credit score. Late payment fees may apply if you do not.

Before you borrow, know what to expect

Your lender can use a home equity calculator and a few other tools to help you determine your most likely monthly payment during the draw period (an interest-only payment) and during the repayment period. Before you borrow from the HELOC loan, consider the adjustments this will make in your monthly payment both now, during the draw period, and later when the HELOC draw period comes to a close. That way, you can only borrow what you can afford to pay back comfortably on time.

Choose a loan without a HELOC prepayment penalty

Though this is not always a requirement, some lenders charge a prepayment penalty during the first 3 to 5 years if you pay off the loan in full. You may be tempted to do this if you suddenly come into a significant amount of money or wish to refinance the loan into a new one. These fees may be 2% or more of the current loan balance.

Pay more than you owe each month

One of the best ways to reduce the overall costs of a HELOC loan is to make payments over what you owe each month. You can always pay extra each month (over and above your interest payment) on your loan. Doing so lets you pay down the principal on the loan.

That’s an excellent way to reduce what you pay overall. The overall cost of borrowing money through a HELOC depends specifically on the principal amount you have each month. If your balance is zero, you are not being charged interest. If your balance is $25,000 and you stay there, you will be consistently charged interest on that full balance. Even paying off just a few extra dollars each month helps you save money in the long term.

Stay knowledgeable about your HELOC balance and keep it under the credit limit. Whenever possible, work towards paying down that principal borrowed. Some ways to do that apply to all home loans (even your mortgage):

• If you receive a tax refund at the end of the year, apply the entire amount to the principal of your HELOC.

• If you get a bonus at work, consider applying it towards your loan.

• Avoid rolling the closing cost of your HELOC into your balance (that way, you are not paying interest on the fees, too)

Risks associated with failing to repay your HELOC

There are risks associated with failing to make payments on time. It’s always good for personal finance objectives to pay your HELOC debt on time every month. When you do this, a HELOC works in your favor, helping you achieve your goals. However, if you fall behind, several things can happen:

• It may hurt your credit score. The lender reports missed payments to the credit bureaus, which could reduce your score.

• Missing payments also lead to fees, adding to the principal and overall cost.

• If you fail to pay your loan and do not use a mortgage refinance option or another loan to pay off the balance, the lender can seek legal action against your home. Remember, this is a secured loan backed by the value of your home.

Set up digital banking and automatic payments, and pay more than you owe each month to consistently stay on top of your HELOC loan. This will help you build credit over time.

Utilizing HELOC Funds

A Home Equity Line of Credit (HELOC) can be a powerful tool for financing home improvement projects. By leveraging the equity in your home, you can access funds to upgrade your property, thereby increasing its value. Whether you’re looking to remodel your kitchen, add a new bathroom, or enhance your outdoor living space, a HELOC provides the flexibility and financial resources to turn your home improvement dreams into reality. Investing in quality upgrades improves your living environment and potentially boosts your home's market value, making it a smart financial move in the long term.

If you're dealing with high-interest debt, such as credit cards or personal loans, a HELOC can offer a viable solution for debt consolidation. Using a HELOC to pay off existing debts, you can reduce your overall interest rate and simplify your finances with a consolidated monthly payment. This strategy can save you money on interest payments and help you pay off your debt faster. However, it's crucial to be disciplined in your repayment plan to ensure that you don't accumulate additional debt, leveraging the lower interest rates of a HELOC to your advantage.

A HELOC can also be a valuable resource for funding significant life expenses, such as education. Whether you’re considering going back to school yourself or financing a child’s college education, the flexibility of a HELOC can help cover tuition and other educational costs. Additionally, a HELOC can be used for other major expenses, such as starting a business, covering medical bills, or financing a significant life event like a wedding. By using the equity in your home, you can access funds at a lower interest rate than other types of loans, making it a cost-effective option for financing significant expenses.

While a HELOC can provide many financial benefits, it’s essential to understand the risks involved. Borrowing against your home equity means putting your property at risk. If you’re unable to make the HELOC payments, you could face foreclosure. Additionally, interest rates on HELOCs are typically variable, which means your payments could increase over time. Having a solid repayment plan and using the funds wisely is crucial. Avoid using a HELOC for discretionary spending or risky investments. Consider your financial situation carefully and consult a professional to ensure a HELOC is the right choice.

By understanding how to use a HELOC effectively, you can maximize the benefits while mitigating the risks, ensuring that you make sound financial decisions that enhance your financial stability and future prospects.

Are You Ready for a HELOC?

By learning as much as you can about a HELOC and how to pay back a HELOC, you can make better decisions for your future about how well these loans may work for your needs. Remember that HELOCs follow the same rules as traditional loans (and you should use an Equal Housing Lender with a proven track record to borrow from for your loan).

HELOCs offer many benefits, including low interest rates and competitive access to the money you need when you need it. As long as you have a proactive repayment strategy that allows you to stay on target for timely payments, you should have no trouble utilizing these loans for your needs.

Expert advice and guidance are always recommended when making any personal finance decision. Let Triad Bank guide you in establishing, refinancing, or repaying a HELOC loan. Contact us today to speak to a home loan specialist about the availability of a HELOC that fits your needs.

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