Home Equity Loans and HELOCs: Draw Periods, Freezes, and Rescission Rights

A home equity loan and a home equity line of credit both put a lien on the house, and both can end in foreclosure. Two moments catch borrowers off guard. The first is a freeze — a lender suspending further advances or cutting the credit limit, which federal law allows only on defined grounds. The second is the end of the draw period, when interest-only or minimum payments convert to fully amortizing ones and the monthly bill jumps. A third rule runs at the very beginning: a three-business-day right to cancel a new lien on a principal residence.

Two products, one lien on the same house

A home equity loan is closed-end credit: a single lump sum, a set term, a fixed schedule. Once the money is disbursed there is nothing left to draw.

A HELOC is open-end revolving credit. The lender approves a limit, and the borrower draws, repays and draws again during a defined draw period. When it ends, drawing stops and the account converts to repayment.

That last row is the one people skip. A missed payment on an unsecured card produces collection calls; a missed payment on either of these produces a path to foreclosure under state procedure.

When a lender may suspend the line or cut the limit

Regulation Z, the Truth in Lending Act's implementing regulation at 12 CFR part 1026, limits how a creditor may change an open-end plan after it has been opened. Regulations change, so as of mid-2026 the CFPB's Regulation Z page is where the current wording and commentary should be confirmed.

Two grounds account for most freeze notices: a significant decline in the value of the dwelling below its appraised value for purposes of the line, and a material change in the consumer's financial circumstances giving the creditor reason to believe the repayment terms cannot be met.

The rest are narrower: default on a material obligation, government action preventing the creditor from imposing the plan's rate, and the account reaching the plan's maximum rate. Outside that list, a creditor generally may not stop lending on a line it has opened.

The creditor must send notice, and must reinstate credit privileges once the qualifying condition no longer exists. Reinstatement follows a borrower request and an investigation rather than happening automatically, so silence after a freeze usually means nothing has changed.

Note: A freeze is not a demand for repayment. The balance keeps running on the agreed terms; what stops is the ability to draw. A reduced limit can still affect credit utilization reported to the bureaus.

Payment shock at the end of the draw period

During the draw period, many lines require only interest, or a minimum that barely touches principal, so the balance sits where the borrower left it. Then the draw period ends and the loan has to amortize over whatever term remains.

The arithmetic is unforgiving, because principal now has to be repaid over a shorter stretch of years than a first mortgage would use. Some plans instead call for a balloon payment — the whole balance at once — which is a different problem with a shorter fuse.

1. Application

   The required open-end home equity disclosures and program brochure are provided.

2. Closing

   The security instrument is signed, and each owner with an interest in the dwelling receives the notice of the right to rescind.

3. Three business days later

   The rescission window runs; funds are generally not disbursed until it expires.

4. Draw period

   Advances are available up to the limit. A suspension or limit reduction can occur here.

5. End of draw

   Drawing stops. The account converts to a repayment schedule, or a balloon becomes due.

6. Repayment period

   Amortizing payments run until the balance clears, unless the borrower refinances or sells.

Options shrink once the conversion arrives: paying down principal during the draw, refinancing while income and equity still support it, or selling. A separating household faces the same arithmetic on a tighter timetable, which is one reason equity lines complicate buyouts and sales of the family home.

The three-business-day right to unwind

The Truth in Lending Act gives a right to rescind certain transactions taking a security interest in the borrower's principal dwelling. The statute is 15 U.S.C. § 1635. The window is three business days, counted from the latest of consummation, delivery of the material disclosures, or delivery of the rescission notice.

The limits matter as much as the right. Rescission does not reach a loan used to buy or build the home, and it does not reach a second home, a vacation property or an investment property. It does reach a home equity loan or HELOC taken on the residence the borrower actually lives in.

If the disclosures or the rescission notice were not delivered properly, the period extends. The statute caps that at three years from consummation, and the right can end earlier on sale of the property. How an extended right is exercised is technical, turning on details of delivery and documentation.

Watch out: The window is counted in business days and is not extended because a borrower was traveling, ill or waiting on a family decision. Rescission must be exercised in writing within the period; a call to a loan officer is not a substitute, and lenders need not remind anyone the clock is running.

Which layer of law decides what

Disclosure, the freeze rules and the rescission right are federal and apply in every state; the CFPB publishes borrower material alongside the regulation on its consumer site.

Almost everything that happens when a loan goes wrong is state law: whether foreclosure runs through a court or a trustee sale, how much notice is required, whether a deficiency can be collected, and whether a redemption right follows the sale. Homestead protection is state law too — Texas and Florida, for example, are cited for broad homestead rules — and the same pattern governs homestead relief and property tax exemptions.

State law also decides who has to sign. Community property states, states recognizing dower or curtesy, and states with homestead consent requirements can each require a non-borrowing spouse to join the security instrument even when that spouse is not on the note.

Lien priority is the last piece. An equity line usually sits behind the first mortgage, so in a foreclosure or short sale the senior lien is satisfied first and the junior lender may pursue the borrower personally where state law allows. Federal programs administered by HUD touch first mortgages far more often than junior liens.

Common questions

My lender froze my line without warning. Is that allowed?

It is allowed only on the grounds Regulation Z lists, most commonly a significant decline in the home's value or a material change in the borrower's finances suggesting the repayment terms cannot be met. The creditor must notify the borrower and give a reason. If that reason is wrong or has since resolved, ask for reinstatement: the creditor must restore privileges once the qualifying condition no longer exists.

Can I still cancel a home equity loan after the money has been spent?

Generally no. The three-business-day right ends on schedule, and rescission requires returning the money the borrower received. An extended right can exist where disclosures or the rescission notice were never properly delivered, but it is capped at three years from consummation and the analysis is technical. Spending the proceeds does not by itself destroy the right, though it does complicate the unwinding a court would have to order.

Why did my payment nearly double in a single month?

That is the classic end-of-draw conversion. During the draw period the plan may have required interest only, so the balance never fell. When drawing stops, the same balance has to amortize over the remaining term, which can be considerably shorter than a first mortgage. Some plans use a balloon instead. The change is written into the original agreement, not imposed later, which is why lenders rarely treat it as negotiable.

Does the three-day right cover a line on a rental property I own?

No. The right of rescission attaches only to a security interest in the consumer's principal dwelling. A line secured by a rental house, a vacation home, or a property held for investment falls outside it, and so does a purchase-money loan used to acquire the residence. State law may supply some separate cancellation right in narrow situations, but there is no federal three-day cancellation for non-principal-residence liens.

If a notice arrives, work in this order

1. Read what the notice says. Separate a suspension of advances from a limit reduction, and find the stated reason. Different actions, different fixes.
2. Pull the original agreement. Confirm the draw period end date, whether a balloon applies, and what the plan says about reinstatement.
3. Test the stated reason. For a value decline, gather recent comparable sales or a current appraisal; for a change in circumstances, assemble income documentation.
4. Ask for reinstatement in writing. Send a dated request with the supporting material and keep a copy. Creditors investigate on request, not on their own.
5. Plan for the conversion date. If the draw ends within a couple of years, model the amortizing payment while refinancing or selling is still live.
6. Watch the junior position. If the first mortgage is in trouble, the equity lender rides behind it, and a frozen bank account is a separate problem with its own exemption claim procedure.

Practical step: Older homeowners weighing a line of credit against a reverse mortgage should compare the two on what happens when income drops, not on the opening payment. The products fail in different ways.