How Does a HELOC Work? Draw, Repayment and Rates Explained

A HELOC works in two phases. During the roughly 10-year draw period you borrow from your credit line as needed and typically make interest-only payments. Then a 10-to-20-year repayment period begins: no new draws, and your payments switch to principal plus interest. You pay interest only on what you draw, and the rate is usually variable.

The Two Phases of a HELOC

Every HELOC follows the same two-phase life cycle. Understanding each phase is the key to using a HELOC safely, because the rules — and your payment — change when you cross from one to the other.

Phase 1: The draw period (about 10 years)

The draw period is the active borrowing window. Once your line is open, you can draw funds at any time, in any amount, up to your credit limit. Repayments you make free up room to borrow again, so the line revolves for the full length of the draw period — typically around 10 years, though some lenders offer shorter or longer terms.

Minimum payments during the draw period are commonly interest-only. That keeps early payments low, but it also means your principal balance does not shrink unless you voluntarily pay more than the minimum. Borrowing again later simply resets that balance higher.

Phase 2: The repayment period (about 10 to 20 years)

When the draw period ends, the line closes to new borrowing and the repayment period begins, usually lasting 10 to 20 years. Your remaining balance is paid down with principal-and-interest payments, amortized over the repayment term — much like a standard installment loan. Because principal is now part of every payment, monthly bills rise compared with the draw period.

Example timeline

Imagine you open a HELOC in year 1. From years 1 through 10 you draw $30,000 for a kitchen remodel, repay $10,000, then draw $15,000 for a roof repair — all while making interest-only minimum payments on whatever balance is outstanding. In year 11 the draw period ends. You can no longer draw, and the remaining balance converts to principal-and-interest payments spread over, say, 20 years. Your monthly payment increases, and every payment now reduces the balance until the line is paid off.

How Interest Is Charged

Three rules govern HELOC interest, and together they explain why two borrowers with the same credit limit can pay very different amounts.

You pay interest only on the drawn balance. Interest accrues on what you have actually borrowed, not on your full credit limit. A $100,000 line with $20,000 drawn costs you interest on $20,000. Draw nothing, and you owe no interest at all.

The rate is usually variable. Most HELOC rates are built from an index — commonly the Wall Street Journal prime rate — plus the lender's margin. If prime is 7 percent and the margin is 1.5 percent, your rate is 8.5 percent. When the index moves, your rate moves with it, and your payment changes too. Lenders set caps limiting how high the rate can go, but exact caps vary by lender. See our HELOC rates guide for how this works in practice.

Interest is typically calculated on the average daily balance. Each month, the lender totals your balance for each day, averages it, and multiplies by the monthly rate. Drawing a large sum late in the month therefore costs less interest that month than drawing it on day one.

Interest-Only Payments: A Worked Example

During the draw period, many lenders set your minimum payment to that month's interest. Here is exactly what that looks like with real numbers.

Say you have drawn $50,000 and your HELOC rate is 8.5% APR. The monthly interest-only payment is the balance times the annual rate, divided by 12:

$50,000 × 0.085 ÷ 12 = $354.17 per month

That $354.17 covers interest only. The $50,000 principal stays exactly the same. If you keep making only minimum payments for the whole 10-year draw period, you will have paid tens of thousands in interest and still owe the full $50,000 when repayment begins. Paying extra toward principal during the draw period is the simplest way to keep the eventual payment jump manageable.

All figures are estimates for illustration only — not financial advice. Your actual terms will differ; confirm with your lender.

Want to run your own numbers? Use the free HELOC calculator to model interest-only payments at any balance and rate.

What Happens When the Draw Period Ends

At the end of the draw period, two things change at once: you lose access to new draws, and your payments convert to principal plus interest over the repayment term. That combination produces the payment jump borrowers call payment shock.

Using the same $50,000 balance at 8.5% APR, repaid over a 20-year repayment period, the new monthly payment is roughly $433.91 — principal and interest. Compare that with the $354.17 interest-only payment from the draw period: the same balance now costs about $80 more every month, and it keeps costing that until the balance is gone. With a shorter repayment term or a higher rate, the jump is larger.

All figures are estimates for illustration only — not financial advice. Your actual terms will differ; confirm with your lender.

Three things make payment shock worse: carrying a large balance into the repayment period, a rate that has risen since you opened the line, and a short repayment term. Three things soften it: paying down principal during the draw period, drawing less than the maximum, and — where the lender allows it — refinancing or converting the balance to a fixed-rate option before the draw ends. Our draw period guide covers strategies for managing this transition in detail.

Minimum Payment Rules

Lenders set minimum payments, but the rules vary. During the draw period the minimum is often interest-only, though some lenders require a small principal component. During the repayment period the minimum is a fully amortizing principal-and-interest payment. A few lenders also set a floor — a minimum dollar payment regardless of balance. Always read the payment terms in your agreement, because the minimum is a floor, not a recommendation: paying only the minimum during the draw period maximizes your total interest cost.

Typical HELOC Fees

A HELOC's interest rate gets the attention, but fees add to the true cost. Common ones include an origination or application fee, an appraisal fee to value your home, an annual fee charged each year the line is open, and sometimes a transaction fee for each draw. Some lenders charge an early closure or termination fee if you close the line within the first two or three years. Others waive many of these fees to win your business — but waived fees sometimes come back as a penalty if you close early, so compare the full fee schedule, not just the headline rate. Start with the basics in our what is a HELOC guide if any of these terms are new.