What is an Interest-Only HELOC?
A home equity loan is secured against your home’s value, usually resulting in lower interest rates compared to unsecured loans like credit cards or personal loans. Depending on your tax situation, you might even be able to deduct the interest on your taxes, similar to your primary mortgage. (Always consult your tax adviser for advice specific to your situation.)
A HELOC, or home equity line of credit, works like a standard home equity loan, but you draw from it as needed. For example, if you’re getting a new roof, you can draw a portion for the down payment and then draw more as the project progresses, up to your credit limit. If your project costs less than expected, you only borrow what you need with a HELOC.
With a HELOC, you make payments only on what you borrow. In contrast, a lump sum home equity loan requires you to borrow the full amount upfront, even if you don’t need it all, and make payments on that full amount. During the draw period, you can use the remaining credit limit in your HELOC for other needs without applying for a new loan.
An interest-only HELOC allows you to pay only the interest during the draw period, typically ten years. During this time, you can draw from the line of credit and make payments based only on the interest of what you’ve borrowed. After the draw period, you can no longer draw on the line of credit, and your payments will include both principal and interest. The principal is the amount you’ve borrowed, which may differ from your credit limit depending on how quickly you use the funds.
When Does an Interest-Only HELOC Make Sense?
If you anticipate a series of expenses over a ten-year period and prefer flexible payments, an interest-only HELOC might be a good fit. You’ll need to meet credit score, equity, and other requirements, but you’ll benefit from lower interest rates that may also be tax-deductible.
HELOC funds can be used for various purposes, such as paying for college, consolidating credit cards, or covering unexpected expenses. However, using them for non-home-related expenses may affect your ability to deduct the interest. Defaulting on the line of credit could put your home at risk of foreclosure.
Ensure you can afford the payments once the draw period ends. We can help you explore scenarios to ensure your budget can accommodate these payments. Making principal payments during the draw period can free up more HELOC funds for future projects and lower your payments once the draw period ends. The less principal you’ve borrowed, the lower your payments will be.
The convenience of accessing HELOC funds without a new loan application is a significant benefit. As long as funds are available, you can draw from your line of credit when needed, without waiting for loan approval and fund disbursement.
Ready to apply for a HELOC? Explore your options now.
