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Interest only HELOCs come with lower monthly payments at first
Home equity lines of credit — or HELOCs — let you borrow money from your home’s value, freeing up cash you can use for anything.
And the interest-only feature that comes with most HELOCs lowers your monthly payment, freeing up cash each month.
If you want the most amount of cash at the lowest cost, an “IO HELOC” could be the answer.
How does an interest only HELOC work?
With an interest only HELOC you’d pay only interest payments at first. Here’s how they work:
- You’d pay only interest during the loan’s draw period
- The draw period (the time frame you’re allowed to draw out funds) usually lasts 10 years, but it can vary by lender
- Paying only interest lowers the HELOC’s monthly payment
- You can pay down the loan’s principal balance during the draw period, if you want
- When the draw period ends, principal and interest payments are required
- When regular payments begin, interest and principal payments are typically spread across 20 years
- HELOC interest rates are normally variable and can change each year
- Variable interest rates are based on market conditions
- A rate change could increase or decrease monthly payments
- Since loan is secured by home equity, rates are more affordable than unsecured loans
- They come with lower closing costs compared to a full refinance
IO HELOC payment examples
The payment on an interest only HELOC is significantly lower compared to a home equity loan, which requires a full principal and interest payment, typically on a 15- or 20-year term.
| Loan amount | IO payment at 6%* | P&I Payment (20-year) at 6%* |
| $50,000 | $250 | $358 |
| $100,000 | $500 | $716 |
| $150,000 | $750 | $1,075 |
| $200,000 | $1,000 | $1,433 |
| $300,000 | $1,500 | $2,149 |
| $500,000 | $2,500 | $3,582 |
*Interest rates are for example purposes only. Apply with a lender for your personalized rate.
If cash flow is your number one priority, choose a HELOC with interest only payments.
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Calculating IO HELOC payment
Just how low is the payment on an interest only HELOC?
It’s pretty simple: Each month you’ll pay 1/12th of the annual interest charges on the loan balance.
Here’s how to do the math:
(Loan balance X interest rate) / 12
Here’s how it works on a $50,000 loan at 6.5% interest:
($50,000 X .065) / 12 = $270.83
Ten years later, when principal and interest payments start, the monthly payment on this loan would be $373, assuming the interest rate stayed the same. If rates decreased to 5.5% by then, the payment would be $344.
Who are interest only HELOCs good for?
Interest only HELOCs have lower payments at first. The loan’s payments will increase later, once the principal balance gets worked into the payments.
For some homeowners, that’s an ideal scenario. For others, not so much.
Interest only HELOCs work well when you’re:
- Short on income, for now: You expect to earn more money by the time the HELOC’s draw period ends and payments increase.
- Getting a short-term loan: You’re spending the HELOC money to increase your home’s value and plan to refinance, based on your home’s higher value, later.
- Selling soon: You expect to sell the home before the draw period expires. Proceeds from the sale will pay off the HELOC’s principal.
- Buying a new house: You’ll use the HELOC funds for a down payment on a new home. Then, when you sell your current home, you’ll pay off the HELOC principal (just be aware you can’t get a HELOC on a home that’s listed for sale).
- A real estate investor: You’re doing a fix-and-flip for a quick, profitable resale.
- Optimizing investments: You plan to invest the loan’s proceeds to earn a higher gain than the HELOC’s interest rate.
All of these scenarios treat the interest only HELOC as temporary financing.
You could get an IO HELOC for longer-term needs, but you may pay more in total interest when compared with a loan whose balance starts going down with the first payment.
Related: 100% Loan-to-value HELOC lenders in every state
IO HELOC pros
- Lower payments: During the HELOC’s 10-year draw period, borrowers repay only interest which lowers monthly payments significantly.
- Lower balances: Withdrawing HELOC funds as needed — rather than borrowing one huge sum — allows for smaller balances and lower payments.
- Lower rates: Using home equity as collateral lowers interest rates compared to credit card or personal loan rates. Plus, initial HELOC rate may be lower than fixed rate mortgage rates.
- Tax benefits: Mortgage interest payments could be tax deductible if you use the funds to buy, build, or make substantial improvements to your home with the funds.
Unlock Your Home Equity with Figure
- Approval in 5 minutes. Funding in as few as 5 days
- Borrow $20K-$400K
- Consolidate debt or finance home projects
- Fastest way to turn home equity into cash
- 100% online application
IO HELOC cons
- Property lien: Like any home equity loan, an interest only HELOC places a lien on your home. The lender could foreclose if you default on the loan later.
- Rates will change: Variable rate changes could increase payments later (payments could also go down depending on market conditions at the time).
- Reduces equity: HELOCs tie up home equity. You’d have to pay off the loan to use the equity again.
- Payments increase later: Payments will go up after draw period ends and principal payments begin.
- More total interest: Keeping the loan indefinitely could mean paying more in interest compared to a traditional HELOC or fixed-rate home equity loan.
HELOC FAQ
Are most HELOCs interest only?
Yes. Most HELOCs come with a 10-year draw period during which you can draw out funds and pay only the interest owed. Then, the loan converts to a fully amortizing loan, typically with a 15- or 20-year term
What happens when the IO period ends?
The HELOC will convert to a principal and interest payment, typically on a 15 or 20-year term. The payment will increase since you’re now paying principal as well as interest.
Is a HELOC rate variable?
Yes. Most HELOCs have a variable rate that’s based on the current prime rate. Many lenders offer a fixed-rate lock-in, where you can convert all or part of the HELOC balance into a fixed-rate loan.
Are there any dangers of paying interest only?
The main concern when paying interest only is that the amount you owe does not decrease. You could pay only interest for 10 years and have the same balance as when the loan started.
Are you allowed to pay principal on an interest only HELOC?
Yes. Most lenders will allow you to pay principal, even to a zero balance at any time during the loan. If the loan is still within the draw period, you can draw those funds out and pay them off again.
Get approved for your interest only HELOC
The low monthly cost of an interest only HELOC makes this a great product for homeowners who need a loan with a lot of flexibility.
Accomplish your financial goals, such as making home improvements, buying an investment property, or consolidating debt.
Unlock Your Home Equity with Figure
- Approval in 5 minutes. Funding in as few as 5 days
- Borrow $20K-$400K
- Consolidate debt or finance home projects
- Fastest way to turn home equity into cash
- 100% online application
Our advice is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
