Many people enjoy the flexibility of a home equity line of credit as a means to pay for that large project, college tuition, family vacation or the consolidation of other debt. If you have equity in your home, it’s a relatively easy loan to be approved for, and it offers benefits like relatively low interest rates, tax-deductible benefits (in some cases) and the option to use the money for whatever you choose.
Yet when it comes right down to it, home equity loan programs are just an additional form of consumer credit-and they can be just as dangerous (if not more so) for borrowers as running up a high-interest rate credit card. This is especially true with an interest only home equity line of credit, a form of credit that can go on virtually endlessly, never touching the principal and continuing to compound personal debt. (This is much like having several credit cards yet never paying more than the ‘minimum monthly payment’, in that you can’t ever seem to get out from under it.)
Considering an interest only home equity program? Keep these facts in mind:
For a set time period (usually 5 to 10 years), you’re only paying the interest for the loan; the principal is never touched. Then, at the end of the term, you’re either hit with a large balloon payment (which you likely have to refinance) or must begin paying monthly charges which include small principal amounts. This will continue for years until the loan is paid off.
Most interest only home equity loan programs are structured around variable interest rates. This means that your payment amounts can fluctuate as often as every month, presenting the risk that you may not be able to make the payments once interest rates rise.
The collateral you’ve set forth to acquire the loan is your house. If you miss payments or default on the loan in any way, you’ve put your family’s home at risk.
If you are still thinking of trying an interest only heloc, there are several options, much like other lending programs, and one of them may be able to suit your needs. Keep in mind that regardless of which loan structure you choose for your home equity line of credit-interest only or otherwise-that there will likely be large up-front costs for starting up the loan, as well as possible additional charges such as annual maintenance fees or even a large balloon payment at the end of the loan term.
It’s always wise to sit down with a financial advisor or loan officer and go over the pros and cons of all of your options before making a decision. Also, be sure to research several different lending institutions before making a decision. Interest rates vary greatly from program to program; look for the best annual percentage rate (APR), especially if you opt for an interest only program.