If you want money to cover a major expense in 2024, a good option is an interest-only home equity line of credit (HELOC). People love the interest-only HELOC because it has a revolving credit line based on your home’s equity, and the money can be used for anything from paying for college tuition to credit card bills or home renovations.
A HELOC is a type of revolving home equity credit line that allows you to withdraw funds as needed during the initial draw period. Once this period ends, you repay the outstanding balance with principal and interest payments, similar to a mortgage. During the draw period, most mortgage lenders only require interest payments.
The Power of the Interest-Only HELOC
An interest-only home equity line of credit refers to the first few years of a HELOC, where you only pay interest on the money borrowed. The principal is paid back after the draw period on the HELOC ends – usually after 10 years. The interest-only period on a HELOC is frequently available but you may not qualify for interest-only payments if you have a low credit score.
You can usually borrow between 80% and 85% of your home’s value with a HELOC. Your loan-to-value is determined by adding up what you owe on your first mortgage with what you intend to borrow with the equity line of credit. The HELOC interest only payment is low and affordable during the draw period.
Similar to a credit card, you can repay your outstanding HELOC balance at any time during the draw period and then borrow it again. Your monthly payment will vary based on the amount you’ve borrowed.
HELOCs Offer Low Interest Only Payments
The interest rate on the HELOC is based on a margin that the mortgage lender determines based on your FICO score, plus the prime rate.
The rate on an interest-only HELOCs are variable and can change as often as every month.
So, the rate you get on your HELOC when you close the loan could go up or down.
However, many HELOCs have a fixed rate for the first few months or year of the loan.
Are you looking for a HELOC interest only payment? Did you know that the minimum monthly payment on a home equity line only covers the interest payments?
In 2024 as in the past two years, interest rates have been elevated by the Federal Reserve to fight inflation.
This has made the interest rates on HELOCs increase, like everything else.
However, many interest-only HELOCs are available today in the 9% range, which is still a low rate when compared to credit cards and personal loans.
How an Interest-Only HELOC Works
With interest only HELOCS, the first five or 10 years of the revolving line of credit are referred to as the draw period. This is when you can pull money from the line of credit. Lenders often allow you to make interest-only payments during the draw period. Even with an interest only HELOC payment there is a minimum monthly payment due which covers the interest incurred the previous month. Don’t forget that you also can pay back principal if you like, but it often isn’t required. Many homeowners make principal and interest payments during the draw period. They just need to specify when making a payment how much they want to go towards the principal.
When the draw period is over, you cannot borrow money from the HELOC anymore. You also cannot make just interest-only payments. Rather, you will need to pay interest and principal during the repayment period. The repayment period can last between 10 and 20 years. The repayment period terms vary by the lender and program. Once the repayment period begins, the draw period and HELOC with an interest only payment option ends.
Your lender will establish a payment schedule that amortizes the loan as you repay. The principal will be slowly paid down, and will be paid off at the end of the repayment period.
When Are Interest Only HELOCs the Best Move for You?
If you get a HELOC, you may be able to make lower payments in the draw period by only paying interest. This can be beneficial for the following reasons:
Flexible Payments
With a draw period of five or 10 years, you may be able to pay only interest for some or all of this time, depending on your needs. For example, if you have your hours cut or lose your job, you could make interest-only payments temporarily. You could use the money you aren’t using for principal payments for other things, such as living expenses.
Lower Interest Rate
Interest only HELOCs remain attractive rate options on the market in 2024. During the draw period the HELOC carries an adjustable rate. You can pay a lower rate than other loan options, plus only pay interest for as long as five or 10 years.
Since the HELOC interest rate is typically variable, which can cause your payment to fluctuate. If the Federal Reserve lowers key rates, you could see your HELOC payment drop.
However, making interest-only payments has risks. First of all, you don’t know what the rate will be years in the future when you have to pay back the principal. Even the best HELOC interest rates come with a variable interest rate. In 2024, there are signs the Fed may begin to cut rates as inflation cools, but there isn’t any guarantee. You could end up paying a much higher rate, although most HELOCs come with a maximum interest rate.
Second, the longer you owe loan principal, the more interest you pay. You will always save money in the long term by paying interest and principal payments from the beginning. Verify the HELOC closing costs when you are shopping lenders. If you want a fixed interest rate, consider an equity loan.
Financing Home Improvements
Making interest-only payments temporarily can help when doing home renovations that take a lot of time and money. Many homeowners do not need all of the money at once for home remodeling so accessing funds as they need to pay contractors is a major benefit. Compare bridge loans and HELOCs.
Paying For College Tuition
If you have kids in college and use the HELOC money for tuition, it also can help your finances to make interest-only payments while they are in school.
What Happens When the HELOC Draw Period Ends?
You can use your interest-only HELOC for only so long. Eventually, the draw period will end and you’ll need to start paying interest and principal. About a year before the draw period ends, you should look at the principal owed, your current rate, and whether the rate is likely to go up or down.
Next, contact your mortgage lender to find out what fully amortized payments will be when the draw period ends. You should look at the worst-case scenario and determine how high payments could go if the maximum rate happens. Take a look at your overall income and expenses to ensure you’ll have the cash to make your principal and interest HELOC payments.
If you have a good credit score, you could refinance the HELOC into a fixed rate product, such as a cash-out home equity loan or a cash out refinance.
The Benefits of an Interest-Only HELOC
A Home Equity Line of Credit (HELOC) is a popular financial tool that allows homeowners to borrow against the equity in their homes. Among the various types of HELOCs, an interest-only HELOC offers unique advantages, especially for those seeking flexible borrowing options and lower initial payments. Here are some of the key benefits of an interest-only HELOC:
1. Lower Initial Payments
One of the most significant benefits of an interest-only HELOC is the lower initial payments. During the interest-only period, typically the first 5 to 10 years of the loan, borrowers are required to pay only the interest on the amount they have drawn from the credit line. This can result in significantly lower monthly payments compared to a traditional HELOC or a fixed-rate home equity loan, where both principal and interest are paid from the beginning.
2. Increased Cash Flow
By reducing monthly payments during the interest-only period, borrowers can enjoy increased cash flow. This can be particularly beneficial for self-employed individuals, retirees, or anyone with irregular income. The extra cash flow can be used to invest in other opportunities, pay down higher-interest debt, or cover other expenses without straining your finances.
3. Flexibility in Repayment
An interest-only HELOC provides greater flexibility in repayment. Borrowers can choose to pay only the interest during the draw period and make larger payments toward the principal when it is financially convenient for them. This flexibility allows homeowners to manage their cash flow more effectively and plan for future expenses or financial goals.
4. Access to Funds on Demand
Like all HELOCs, an interest-only HELOC provides access to funds as needed. Homeowners can draw from their line of credit up to the approved limit, use the funds for various purposes such as home improvements, education expenses, or unexpected emergencies, and repay the amount over time. The ability to borrow and repay repeatedly during the draw period offers significant convenience and financial flexibility.
5. Potential Tax Benefits
Interest paid on a HELOC may be tax-deductible, provided the funds are used for home improvements or other qualifying expenses under IRS rules. This potential tax benefit can make an interest-only HELOC an even more attractive option for homeowners looking to invest in their property or manage large expenses.
6. Opportunity for Strategic Financial Planning
For savvy borrowers, an interest-only HELOC can be a strategic financial planning tool. By leveraging the lower initial payments and increased cash flow, homeowners can invest in opportunities with higher returns, such as business ventures or real estate investments. This can potentially lead to greater financial gains over time, offsetting the costs associated with the HELOC.
Summary on Interest Only HELOC Lines of Credit
One of the great advantages of the HELOC credit line is the ability to borrow funds as needed up to the credit limit during the draw period, while making interest-only payments on the balance.
However, if you maintain an outstanding balance for an extended period, you will accrue more interest over time and ultimately your payments will increase significantly when you begin making principal and interest payments during the repayment period.
One of the best ways to borrow a lot of cash in 2024 is to use an interest-only HELOC. Interest rates have risen considerably since the Pandemic. Credit cards can have rates over 20%, and cash-out refinances may not make sense if you have a lower rate on your mortgage than current rates.
An interest-only HELOC offers a competitive interest rate in the range of 9% or 10% in many cases. Plus, you may be allowed to make interest-only payments for some or all of the draw period. This affordable option can get you the money you need now and keep the monthly payment reasonable. If you have questions about interest-only HELOCs, our loan professionals can answer them today.
An interest-only HELOC offers numerous benefits, including lower initial payments, increased cash flow, repayment flexibility, and access to funds on demand. While it’s important to carefully consider the potential risks and long-term implications, such as higher payments after the interest-only period ends, the advantages make it an attractive option for many homeowners. By understanding these benefits and how they align with your financial goals, you can make an informed decision about whether an interest-only HELOC is the right choice for you.
Most competitive mortgage lenders offer home equity lines of credit with interest-only draw periods, although this can vary with banks and credit unions. As with any finance product, it’s important to shop around for a HELOC. We suggest compare reviews, HELOC rates, and other factors before making your decision.
Home Equity Mart has created a marketplace for homeowners to shop home equity loans and credit lines. We will help you compare lenders that offer a wide range of second mortgage products including fixed rate home equity loans and interest-only home equity lines of credit for financing home improvements, consolidating debt and much more. Let HEM connect you with competitive lenders who can meet your financing needs.