A credit union leader discusses the pros and cons of interest-only HELOCs and explains who may benefit from this loan type.
An interest-only HELOC is a line of credit allowing borrowers to make only interest payments during a specified draw period, typically 10 years. “During this time, you can borrow funds as needed and make minimal payments, covering just the interest,” says Jose Garcia, president and CEO of Northwest Community Credit Union.
While this option may provide financial flexibility for homeowners, you’ll have to weigh the risks and benefits before deciding if it’s a wise move. Other loan choices may be preferable, so let’s review the pros and cons of an interest-only HELOC before taking the plunge.
What is an Interest-Only HELOC?
A home equity line of credit (HELOC) works like a credit card based on your home equity, where you can withdraw money as needed. With an interest-only HELOC, you don’t have to pay back the loan amount when you take out funds during the draw period.
The HELOC draw period is a time in which you can withdraw funds from your approved credit limit. With a traditional HELOC, you’ll have to repay some of the money you withdraw plus interest during this time. After the draw period, you enter the repayment period or the time to pay the remainder of the balance plus any interest.
“In contrast, an interest-only HELOC allows you to pay just the interest during the draw period, deferring principal repayment until later,” Garcia says.
Home equity is the difference between your home’s market value and the amount you owe on the property. With a HELOC, you can borrow up to 80% of your home equity. Interest rates are usually lower than a credit card’s because the home is the collateral.
How Does an Interest-Only HELOC Work?
An interest-only HELOC is a line of credit. You only pay interest on the balance, so if you delay withdrawals or draw down fewer funds, it will cost less. You don’t have to repay the principal until the HELOC repayment period begins.
Your monthly payment is based on the amount you owe and your negotiated interest rate. Interest rates are variable, so they will change, usually along with the prime interest rate. If you pay more than the interest amount on the loan, you start to pay off the principal amount.
You can withdraw whenever you need it during the draw period.
When the draw period ends, you must pay the principal and the interest. The result is significantly higher monthly payments compared to a traditional HELOC. During this time, you may no longer withdraw money from the HELOC.
Pros and Cons of an Interest-Only HELOC
An interest-only HELOC offers borrowers several benefits, but be aware of the drawbacks.
Pros
- Lower repayments: Since you’re only paying the interest on the borrowed amount, your initial payments are lower.
- Less-expensive financing: The interest on a HELOC is significantly lower than credit card interest or the interest you’ll pay on a personal loan.
- Flexibility: With a HELOC, you decide how much or how little cash to use. “This can be beneficial if you need to manage cash flow for other expenses or investments,” Garcia says.
- Possible tax benefits: Under certain circumstances, you may claim the interest on your tax return for 2025. In the following tax years, the Internal Revenue Service states you could claim the interest regardless of how you use the funds.
Cons
- Higher loan payments later: You must start paying the principal when the draw ends. This results in increased loan payments compared to traditional HELOCs.
- High risk: If, for any reason, you can’t pay, you risk foreclosure and could lose your home.
- Variable interest rates: “Many interest-only HELOCs have variable rates, which can increase over time and lead to higher costs,” Garcia says.
- Risk of overborrowing: “The lower initial payments might tempt you to borrow more than you can comfortably repay, leading to financial strain,” Garcia says.
Who Should Get an Interest-Only HELOC?
Here are a few examples of people who might be good candidates for interest-only HELOCs.
- Those eyeing home improvements: “If you plan to use the funds for home improvements that will increase your home's value, making it easier to handle higher payments later,” Garcia says.
- Anyone going through an emergency: Sometimes emergencies, like major household repairs, demand more cash than you have. A HELOC can offer relatively low-interest cash when you need it most.
- Those with high debt: Consolidating your high-interest debt over a longer-term loan may help you reduce monthly financial pressures.
Who Shouldn’t Get an Interest-Only HELOC?
Here are a few people who should avoid interest-only HELOCs.
- Those with poor financial discipline: HELOCS offer borrowers easy access to funds. If you have a record of poor financial discipline, you could get into deeper debt with a HELOC.
- Anyone with uncertain income: You must have confidence that you can service the variable interest rate and pay back the principal when the time comes. If you don’t, you’ll put your home at risk of foreclosure.
Interest-Only HELOC Options
Not every lender offers interest-only HELOCs, but one institution does, PenFed, a credit union designed for self-employed individuals. Not only that, they also offer competitive rates and can close on a loan within 15 days (other lenders can take up to two months to close). There are some downsides, including higher closing costs and a lower TrustPilot rating than other lenders, but it’s a great place to start if you’re looking for an interest-only HELOC.
Check out our list of the best home equity line of credit lenders, approved by financial experts.
The Bottom Line
Interest-only HELOCs offer financial flexibility by allowing homeowners to only cover the interest on money withdrawn from a credit line during the draw period instead of repaying the principal balance and interest. While there are some benefits, here are some things to keep in mind when considering this loan:
- Interest-only HELOCs will have higher monthly payments when the repayment period begins
- HELOC interest rates are variable, so your monthly payments will fluctuate
- There’s a higher risk for overborrowing
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Jose Garcia, president and CEO of the Illinois-based Northwest Community Credit Union. The credit union offers multiple financial services, including HELOC loans.
Frequently Asked Questions
Can I make principal payments on an interest-only HELOC?
Yes, you can make principal payments on an interest-only HELOC. The interest portion is the lowest amount you must pay. Any amount you pay over the interest payment comes off the principal.
Can I use an interest-only HELOC to consolidate debt?
You can use an interest-only HELOC to consolidate debt. The interest rates may be lower than your credit cards, but you should weigh the benefits against the risks.
Can a HELOC be interest only?
Yes, interest-only HELOCs allow you to only cover the interest on any money withdrawn from a credit line during the specified draw period. That said, you must repay the principal balance plus interest when the repayment period begins.
Sources
- Jose Garcia, president and CEO of Northwest Community Credit Union
- Internal Revenue Service, “Is interest paid on a home-equity loan or a home equity line of credit (HELOC) deductible?” https://www.irs.gov/faqs/itemized-deductions-standard-deduction/real-estate-taxes-mortgage-interest-points-other-property-expenses/real-estate-taxes-mortgage-interest-points-other-property-expenses-2
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.