Interest Only Payments - HELOCs Explained

With a Home Equity Line of Credit (HELOC), it's important to understand the difference between interest-only payments and principal and interest payments. During the draw period, you might have the option to make interest-only payments. This means you're only paying the interest on the amount you’ve borrowed, not reducing the principal balance itself. This can make your monthly payments lower initially but remember, you'll eventually need to start paying off the principal as well, which will increase your payments in the future.

On the other hand, principal and interest payments require you to pay a portion of the borrowed amount (the principal) plus the interest accrued each month. This option means higher monthly payments from the start, but it also reduces the principal balance more quickly, potentially saving you money on interest in the long run. Evaluating your financial strategy and understanding these payment options can help you manage your HELOC more effectively and avoid surprises when the repayment period begins.

Choosing to pay both principal and interest on a HELOC is a proactive financial strategy for several reasons. Primarily, it allows borrowers to reduce the principal balance more rapidly, which not only shortens the overall loan term but also results in significant interest savings over the life of the loan. This approach ensures that each payment is not just covering the interest but also chipping away at the actual borrowed amount. Consequently, this can lead to greater financial flexibility and security, as the equity in the home is preserved or even increased at a faster rate. Additionally, by tackling both principal and interest from the beginning, borrowers can avoid the potential shock of significantly higher payments once the draw period ends, and repayment of the principal becomes mandatory.

Preparing for the Repayment Phase

When preparing for the repayment phase of a HELOC, it's crucial to implement prudent budgeting practices to ensure financial stability. Here are several strategies to consider:

Early Repayment Planning: Start planning for the repayment phase during the draw period itself. Begin by gradually increasing your monthly payments to include a portion of the principal, if you haven't been doing so already. This proactive approach can significantly reduce the shock of increased payments later.

Budget Adjustment: Review and adjust your monthly budget to accommodate the expected increase in payment amounts. Identify areas where expenses can be minimized to free up more funds for your HELOC repayment. Consider using budgeting tools or apps to track your expenses more effectively.

Emergency Fund: Aim to build or maintain an emergency fund. Having savings equivalent to at least three to six months of living expenses can provide a financial cushion that helps manage unforeseen circumstances without needing to rely further on credit.

Consult a Financial Advisor: If you're unsure about the best strategy for your situation, consider consulting with a financial advisor. A professional can offer personalized advice based on your financial circumstances, goals, and the specifics of your HELOC.

By adopting these strategies, homeowners can better manage their finances and smoothly transition into the repayment phase of their HELOC, ensuring they maintain financial health and stability while paying down their debt.

More Information:

HELOCs Explained Draw Period | Loan to Value (LTV)

From the CFPB: What You Should Know About Home Equity Lines of Credit

At SCU Credit Union we offer our members home equity lines of credit and home equity loans with competitive rates and flexible terms. For Home Equity Lines of Credit, we lend up to 80% of the assessed value or up to 80% of the appraised value, whichever is less, minus the remaining balance on your first mortgage on 1-4 family owner occupied residences.

You can apply online or stop in at one of our branches for assistance or reach out to our member service call center at 781-784-7725 or toll free at 1-877-661-3300.