Understanding Interest-Only HELOC Payments
During the draw period of your HELOC (typically 5-10 years), you're only required to make interest-only payments. This means your monthly payment covers just the interest charges on the amount you've borrowed, not the principal balance.
Benefits of Interest-Only Payments
- Lower Monthly Payments: Interest-only payments are significantly lower than principal + interest payments
- Flexibility: You can choose to pay more than the minimum to reduce principal
- Cash Flow Management: Keeps monthly costs low during the draw period
Important Considerations
- Principal Doesn't Decrease: Unless you make extra payments, your balance stays the same
- Payment Shock: When the draw period ends, payments can double or triple
- Variable Rates: Most HELOCs have variable rates, so payments can change
How to Calculate Interest-Only Payments
The formula is simple: (Loan Balance × Annual Interest Rate) ÷ 12 months = Monthly Interest-Only Payment
For example, if you have a $100,000 HELOC at 7.5% APR:
($100,000 × 0.075) ÷ 12 = $625/month
Expert Tips for Smart Borrowing
The 'Side Fund' Strategy
If you pay Interest Only, take what you 'saved' and put it in a high-yield savings account. You build a cash buffer to pay off the loan later.
Watch the Clock
Set a calendar reminder for 1 year before your Interest-Only period ends. You need a plan before the payment shock hits.
Use for Cash Flow, Not Toys
Using Interest-Only to buy a boat is bad debt. Using it to cash-flow a rental property renovation is leverage. Know the difference.
Principal Trick
Even during the interest-only phase, rounding up your payment effectively lowers your effective interest rate by reducing the daily balance.