Home equity lenders may structure HELOCs in a variety of ways. They may require principal payments during the draw period, and in some states, they may require balloon payments. Home equity lines of credit allow borrowers to draw funds for a defined period of time (often called a “draw period”), which may be followed by another period during which those funds must be repaid (often called a “repayment period”). Home equity lines of credit typically require the borrower make a monthly payment to the lender during both the draw period and any repayment period. For some home equity lines of credit, the monthly payment during the draw period may include only the needed amount to pay the monthly interest on the outstanding balance. Depending on the lender, the monthly payment during the draw period also may include an amount to pay down the principal balance.

During any repayment period, each monthly payment generally includes an amount to pay down the outstanding balance, plus an additional amount to pay the monthly interest on the outstanding balance. Loan payments for the repayment period are amortized, so the monthly payment remains the same throughout the repayment period. During that time, the percentage of the payment that goes toward principal increases as the outstanding mortgage balance decreases.