What Is an Interest-Only HELOC?
Quick Answer
An interest-only HELOC is a home equity line of credit you can draw on for a set period of time, often 10 years. During the draw period, you’re only responsible for paying interest on the amount you’ve borrowed.
A home equity line of credit (HELOC) can provide homeowners with quick financing on an as-needed basis. That could come in handy if you've got home renovations in the works or experience a financial setback and need cash quickly. An interest-only HELOC has an initial draw period where you can borrow funds while only making interest payments. After that, you'll start repaying the principal balance along with interest.
Interest-only HELOCs have important drawbacks to consider, however. Here's what you need to know about how interest-only HELOCs work and when you might consider getting one.
What Is an Interest-Only HELOC?
An interest-only HELOC is a type of credit that lets you borrow funds against your equity and pay only interest during a set period.
An interest-only HELOC works similarly to a credit card. Both come with a credit limit that determines how much you can borrow. But with a credit card, you can borrow funds and repay your balance on an ongoing basis, for as long as your card account is open.
HELOCs, on the other hand, have a specific draw period that usually lasts 10 years. This is the only time you can use your credit line to access money.
Tip: HELOCs are known for offering competitive interest rates because the credit line is secured by the home. That means your home will serve as collateral, which comes with the risk of foreclosure if you don't pay back the loan as agreed.
How Do Interest-Only HELOCs Work?
Interest-only HELOCs work by allowing you to make solely interest payments during the draw period. During this time you will not need to pay any of your principal balance—in other words, the amount you borrow against the line of credit.
After the draw period ends, you'll begin repaying the total amount you borrowed, plus interest, and cannot draw from available funds any longer.
Learn more: How Do HELOC APRs Work?
Interest-Only HELOC vs. Traditional HELOC
Interest-only HELOCs and traditional HELOCs are often one and the same since HELOCs typically do not require you to make payments on your principal balance during the loan's draw period. That said, some lenders do require monthly payments that include a portion of the principal with the accrued interest.
Beyond how they typically treat payments, interest-only HELOCs and traditional HELOCs are also the same in that:
- Most charge a variable annual percentage rate (APR). That means your interest rate (and monthly payment) may bounce up and down over time. In some cases, it could change from month to month.
- You'll need sufficient equity to qualify. You'll usually need 15% to 20% home equity to qualify for a HELOC. Home equity is the amount of your home that you own outright, and it's calculated by subtracting your mortgage balance from your home's current value.
- Your credit score matters. Every HELOC lender is different, but you'll likely need a minimum credit score of 680 to qualify. Some lenders may require a score in the 700s.
- Your overall financial health will come into play. Most lenders will want to see a low debt-to-income ratio (DTI), or the amount of your monthly income that goes toward debt payments. A DTI that's over 43% could be a stumbling block. You can also expect lenders to verify your income to ensure that you're capable of repaying the HELOC.
Tip: Before agreeing to a HELOC, be sure to carefully review your specific lender's terms to understand whether principal payments are required during the HELOC's draw period.
Pros and Cons of an Interest-Only HELOC
While interest-only HELOCs have some perks, you should balance them against the downsides for a fuller picture.
Pros
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You can borrow funds as needed. Instead of taking out a lump-sum loan, you borrow funds when you need to during the draw period. This can provide greater flexibility with your finances.
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Interest rates tend to be lower than other options. As of July 2025, some HELOCs have rates as low as 7.5%. Credit cards and personal loans typically charge much higher interest.
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You're only on the hook for interest payments during the draw period. This can result in a low monthly payment—sometimes for a decade. That might be a good thing if money is tight but you expect your financial health to improve in the future.
Cons
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Your payment could spike after the draw period. Once the interest-only period ends, you'll be responsible for repaying your principal and interest. That could result in a much larger monthly payment than you had before.
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You'll put a dent in your home equity. Your equity increases with every mortgage payment, but borrowing against your ownership stake will decrease the home equity you've worked to build. If your property value declines, you could end up owing more than your home is worth.
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Your home is on the line. With your home as collateral, you could lose your property if you default on your HELOC payments.
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Interest rates are usually variable. If interest rates start trending upward, a variable HELOC rate will probably do the same. That could make it harder to budget—and your monthly payment could grow larger over time.
Learn more: Should You Tap Into Your Home Equity?
Should You Borrow With an Interest-Only HELOC?
Interest-only HELOCs might make sense if you have adequate home equity, strong credit and:
- Experience a financial emergency—like an unexpected home repair or job loss—and need cash quickly
- Plan to use the credit line to consolidate debt and save money in the long run
- Want to use a HELOC to make renovations that will increase your home value before selling
No matter what, you'll want to feel confident in your ability to repay the HELOC as promised. Otherwise, it could put your credit, and your home, at risk.
Interest-Only HELOC Alternatives
You may decide that an interest-only HELOC isn't the right financing option for you. In that case, one of these alternatives might be a good fit.
- Home equity loan: This works like a HELOC but isn't a line of credit. Instead, a home equity loan provides a lump sum of cash upfront that you repay over time. Interest rates tend to be lower than personal loans and credit cards because your home serves as collateral.
- Cash-out refinance: With a cash-out refinance, you can access some of your home equity when refinancing your mortgage. This will result in a new, larger loan than you had before. You'll receive the difference in cash that you can use any way you want.
- Personal loan: This may be a last resort since interest rates can be as high as 36%. A personal loan is a form of unsecured debt, which means there's no collateral backing it.
The Bottom Line
An interest-only HELOC can provide cash on an as-needed basis. You won't have to start repaying your principal until after the initial draw period, which typically lasts 10 years. After that, your monthly payment could go up significantly. Your home is also at risk since it serves as collateral. This is all to say that you'll want to consider the pros and cons before getting an interest-only HELOC.
If you decide that it's right for you, you'll likely need sufficient home equity and a strong credit score. You can check your FICO® ScoreΘ and credit report for free with Experian.
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About the author
Marianne Hayes
Marianne Hayes is a longtime freelance writer who's been covering personal finance for nearly a decade. She specializes in everything from debt management and budgeting to investing and saving. Marianne has written for CNBC, Redbook, Cosmopolitan, Good Housekeeping and more.
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