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Home Equity HELOCs

How Interest-Only HELOCs Really Work

A home equity line of credit (HELOC) is a type of revolving credit that allows you to borrow and repay the funds repeatedly during the initial draw period. Once the draw period ends, you repay the outstanding balance via principal and interest payments, just like a mortgage. 

During a HELOC’s draw period, most lenders only require you to make interest-only payments. However, you can pay more than the minimum—and if you’re using the HELOC as intended, you should do so. 

If you want to access your home’s equity when needed, such as to cover a short-term expense, the costs can be more affordable than credit cards or personal loans. However, the costs can quickly add up if you carry a balance. Read on to learn more about an interest-only HELOC, including when to consider getting one.

What is an interest-only HELOC?

A HELOC typically has two periods: an initial interest-only draw period and a repayment period when you make traditional principal and interest payments. Therefore, most HELOCs are interest-only HELOCs during the initial draw period.

While the terms and conditions of the HELOC can vary by lender, the draw period often lasts five to 15 years. In the draw period, you’ll usually only be required to make interest payments on the outstanding balance, though this can vary (some lenders may require principal payments). 

Like 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, depending on how much you’ve borrowed. The HELOC interest rate is typically variable, which can also cause your payment to change.


While HELOCs and home equity loans are similar, a HELOC works like a credit card, allowing you to repeatedly borrow up to the credit limit with interest-only payments. Like a mortgage, you borrow the funds simultaneously with a home equity loan and make principal and interest payments. 

You’ll either need to repay the balance in full at the draw period’s end, or the HELOC may enter a repayment period. The repayment period works like a mortgage, requiring you to make regular payments of principal and interest sufficient to allow you to fully repay the balance in 15 to 25 years.

The following graphic illustrates how the draw and repayment period works for most HELOCs:

Image shows a borrower withdrawing three times during the draw period, then making full principal + interest payments during the repayment period

Here’s an example to add perspective:

  • You have a $100,000 HELOC with an outstanding balance of $50,000
  • You have an annual interest rate of 6%.
  • Your monthly interest-only payment on this balance would be $250.  

Your payment will also change as your balance increases or decreases or your variable interest rate changes. For example:

  • You fully draw the HELOC up to its $100,000 credit limit. 
  • Your monthly payment would be $500 at 6% interest.
  • It would increase even more to $583 if the rate rose to 7%.

While the amount you owe each month varies based on the amount you borrow, you won’t need to worry about paying down the principal amount you’ve borrowed until later (unless you want to). This can be helpful if you face limited cash flow during the draw period.

However, when the draw period ends, your payment will be spread over the remaining term and include both principal and interest. For example:

  • At the draw period’s end, let’s say your balance is $100,000.
  • You have a fixed interest rate of 7%, and the term is 20 years
  • Your monthly payment would be about $775.


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Pros & cons of an interest-only home equity line of credit

An advantage of a HELOC is the ability to borrow the funds as needed up to the credit limit during the draw period and make interest-only payments on the balance. 

Even so, if you carry an outstanding balance for an extended period, you’ll pay more interest over time. Plus, your payments will increase significantly when you need to begin making principal and interest payments during the repayment period.   


  • Flexible

    Funds can be borrowed and repaid repeatedly during the draw period

  • Low interest-only payments during the draw period

  • Lower rates than credit cards and personal loans

    This is because your home secures the HELOC

  • Interest can be tax-deductible 

    This is the case if you buy, build, or substantially improve your home and itemize the deductions


  • Larger principal and interest payments during the repayment period

  • Your home is collateral

    This puts your house at risk if you can’t repay

  • Generally have variable interest rates that will change over time

  • Results in more interest paid over the life of the loan if you carry an outstanding balance

Interest-only HELOCs have their benefits, but they’re not suitable for everyone. See below to find out when one of these loans may be best—and when they’re better off avoided.

If you…Consider an interest-only HELOC?
Want low payments now & can afford larger payments later. 
Want to access your home equity on demand.
Want to use the funds for a higher-return investment & are comfortable putting your home at risk. 
Flip houses & prefer to use home equity to fund it.
Are buying another home & want to use home equity to fund the down payment before you sell.
Want a lower rate than a credit card or personal loan offers. 
Struggle with budgeting or financial planning.
Have a small amount of home equity.
Are financially unstable.
Want to reduce total financing costs.

It may be suitable if…

In many situations, an interest-only HELOC may be a decent choice. A HELOC is particularly good if you want to access some of your home equity and repay it as needed over and over again since it’s a revolving line of credit. Its flexibility makes it suitable for many situations. 

Some scenarios when interest-only home equity lines of credit could be suitable are when you:

  • Prefer low payments now, with the ability to cover larger payments later: If you’re looking for payment flexibility, a HELOC can offer this since the draw period typically only requires interest payments. However, you must be prepared to make a larger payment later. 
  • Want to access your home’s equity on demand: A HELOC allows quick access to your home’s equity since it’s a revolving line of credit. If you need to use your equity, you can get the funds immediately rather than potentially waiting weeks for approval on a home equity loan or other financing. 
  • Plan to use the funds for a higher-return investment: If you have a lot of home equity and want to use the funds toward investments with higher interest earnings, this can be a viable option. However, remember that you’re putting your home at risk, so carefully weigh the risk versus reward.
  • Flip houses: A HELOC can be a flexible way to help you buy, repair, and flip houses since you can borrow and repay the funds on demand while making low interest-only payments. However, remember that your home is at risk if the flip doesn’t go as planned.
  • Need to use your home’s equity for a down payment on another home: This can be a good option if you need funds for a down payment/closing costs on a new property and plan to sell your old home shortly.
  • Prefer a more affordable financing option than a credit card or personal loan: If you plan to use a credit card or personal loan for your expenses, you can lower your rate by choosing a HELOC. Plus, you may be able to get a higher credit limit (depending on how much equity you have in your home). 

It may not be suitable if…

You should avoid an interest-only HELOC if your income is unstable (and you’re not confident it will rise in a few years) or if you can afford to make more than interest payments now.

Interest-only HELOCs might also be a bad idea if:

  • Budgeting or financial planning isn’t your strong suit: Since your monthly payment will vary with a HELOC, budgeting can be more difficult. If you’re not good at managing your budget, you should avoid using a HELOC.  
  • Cost-saving is your goal: The costs of a HELOC can quickly add up if you carry a balance, make interest-only payments, and don’t pay down the principal balance. The quicker you pay down the principal balance, the less you’ll pay in interest on the loan. 
  • Equity in your home is low: You typically need to maintain at least 80% to 85% home equity to get approved after factoring in your mortgage balance and the HELOC limit. A HELOC may not work if you haven’t yet built up much equity in your home.
  • Financial stability is weak: Not only will your payments vary during the draw period as your interest rate changes and balance fluctuates, but the payment may significantly increase during the draw period. You may want to avoid a HELOC if your income and expenses are unstable. 

Ask the expert

Crystal Rau


I’ve seen several examples where people will use a HELOC for home renovations to improve the value of their home with the intention of selling it later. Also, many will access their home equity to help pay for their children’s higher education needs because HELOCs can be more affordable than a private loan. It becomes problematic when people have a spending problem and no real strategy for how they will be using it. I’ve heard, “I can deduct the interest,” which is only the case if you itemize deductions, and most people don’t have enough deductions to do so and really do not get to deduct anything extra. 

What to consider before your HELOC’s interest-only period ends

Regardless of how well you plan, it can be hard to make those increased payments once your HELOC’s draw period ends. You can use these strategies to ease the burden or even remove it.

Make more than the minimum payment

If you can, start making payments that are more than interest during your draw period. Making even a small dent in your principal balance can shave months off your repayment timeline and reduce the interest you’ll pay over time.

Ultimately, a home equity line of credit is intended to be used as a line of credit, meaning you should quickly repay the principal after you borrow it. Using the HELOC as intended will save you money in the long run.

Replace your HELOC with a home equity loan

Home equity loans let you tap your home equity for quick cash. They often come with fixed rates that might be lower than variable rates HELOC. For this reason, if you don’t need to access the funds more than once, a home equity loan is often the better option. 

If you’re eligible, you can refinance your HELOC into a home equity loan. This would mean lower payments and less interest paid in the long haul.

Consider a cash-out refinance

Refinancing into a larger mortgage loan via a cash-out refinance can free up cash and help you pay off that HELOC balance. Depending on the interest rate environment, you may even get a lower rate than your current mortgage. That would mean lower mortgage payments and overall cost savings.

Downsize your home (or just sell it)

Once your draw period ends, you might consider selling your home and downsizing to a smaller property (if the timing works). Once your home sells, you could use the proceeds to pay off your mortgage and HELOC, using any leftovers as a down payment on a smaller, less expensive property. 

This is a terrific option if you’re nearing retirement or are an empty nester.

Renew your credit line

Depending on how much equity you have in your home, your lender may allow you to renew your home equity line of credit once the draw period ends. 

This would let you keep that lower monthly payment and put off the higher-payment period until later. A warning, though: This means paying more interest in the long run (and spending more time in debt).

Also, lenders will typically want to see that you’ve been using the HELOC as intended – or have enough cash to do so – before agreeing to offer you a new interest-only draw period. If you can’t show that you can afford to do this, the lender probably won’t agree to the renewal. 

Consider a reverse mortgage

If you’re 62 or older, you might consider a reverse mortgage to help you pay off your HELOC balance and fund your retirement. These mortgages pay you (either in a lump sum or monthly payment) to live in your home. 

They’re a solid option if you’re on a fixed income and need to reduce your monthly costs. Once you vacate the property, the lender pays off the loan balance (plus interest) with the proceeds from the home sale.

Where to find HELOC lenders

Most major mortgage lenders offer home equity lines of credit with interest-only draw periods (though this could vary by lender). As with any mortgage loan, shopping around for a HELOC is important. Compare customer service, rates, and other factors before making your decision.

Need help choosing the right lender for your interest-only HELOC? Here are our top-rated HELOC lenders.

Ask the expert

Crystal Rau


Determine whether you are looking at HELOC options due to a want or a need. For example, say you dislike the floors in your home. A HELOC may be a solid option to replace them if you plan to update them then sell the property for a higher selling price. It may be unwise if you’re short on cash and just want new floors. Either way, ensure you go in with a proper strategy of using a HELOC responsibly and a way to pay it off ASAP.


Can I get an interest-only home equity loan?

No, most lenders do not offer interest-only home equity loans. However, if you have sufficient equity in your home—typically at least 15% to 20%—you may be able to get approved for an interest-only home equity line of credit (HELOC). 

With most HELOCs, the initial draw period (often five to 15 years) will include interest-only payments followed by a repayment period with standard principal and interest payments (often 15 to 25 years). 

Do all HELOCs have an interest-only option for repayment?

While each lender can set their own HELOC requirements, most HELOCs allow you to make interest-only payments during the initial draw period. The loan will enter a traditional repayment period requiring principal and interest payments after the draw period ends (usually no longer than 15 years).

Can I make more than interest-only payments during my HELOC draw period if I want to?

Yes. A HELOC is a revolving line of credit that allows you to borrow and repay the funds during the draw period. You can always pay more than the required interest-only payments. In fact, if you’re using the HELOC as intended, your goal should be to repay the principal as quickly as possible. 

If I make interest-only payments during the draw period, will I still pay interest during the repayment period?

Yes. Interest is charged on a HELOC any time there is an outstanding balance. When you’re in the draw period, you’re often just required to make interest payments. Once you’ve entered the repayment period, you must pay for interest plus reduce the balance with principal payments.