April 17th, 2017

What is a Home Equity Line of Credit Draw Period?

A draw period is the period of time you can access funds available on a Home Equity Line of Credit. It can vary from bank to bank and even from product to product and is typically in a range of 10-25 years. Monthly payments during the draw period are interest only, meaning you are not required to pay principal. You can if you want, but during the draw period, it is not required.

Is there a minimum payment?

Banks will usually set a minimum payment, such as $100. So if you accrue less interest than that, $100 will be your minimum payment. Anything as part of that payment over the interest then goes towards paying your principal. If you accrue more interest than your minimum payment, then that will be your payment for that month.

What happens when the draw period ends?

When the draw period ends, the repayment period begins. At this point, you are no longer able to draw on the line and you have to start to pay back the outstanding balance, usually over a period of 10-20 years. Your payment will increase because now you are paying both principal and interest based on an amortization schedule that’s tied to the term of the payback period. Interest will also remain variable during this time, so if interest rates go up, your monthly payment will go up. The good news is that if interest rates go down, your monthly payment will go down.

What information do I need?

If you’re exploring borrowing with a Home Equity Line of Credit, you’ll want to determine the length of the draw period. If you already have a Home Equity Line of Credit and don’t know when the draw period ends, contact your bank. Having this information will help you avoid surprises and will enable you to put financial plans in place.

When should I consider refinancing?

If you want to continue to have access to funds on a Home Equity Line of Credit after the draw period ends, you may want to refinance with another Home Equity Line of Credit. If you want to pay back the outstanding balance but lower the monthly payment, you may consider refinancing with a Home Equity Term Loan or even a Mortgage that allows repayment over a longer period of time.

Everybody’s situation is different and that’s why we recommend you talk with your banker. Here at Ephrata National Bank, we’re always happy to help answer any questions you may have.

If you have more questions, visit our HomeLine page or if you’d like to speak with someone, give us a call at (717) 733-4181.