Dear Connie,
A home equity line of credit, or HELOC, at least in the early years
of the loan, has monthly payments that are interest-only. You can
make principal payments on the loan by adding an additional amount
to your monthly payment. It's a good idea to keep track of these
additional principal payments to make sure the lender is correctly
adjusting your outstanding loan balance.
Since a HELOC is a line of credit, you may have had a minimum draw requirement on that line when you closed on the loan. There is also the possibility of a prepayment penalty if you pay down the loan balance too aggressively. Since you originally thought you had a home equity loan and not a HELOC, my guess is that you took out a substantial draw at closing and any minimum draws or prepayment penalties won't be an issue with you, but you do want to either review your loan documents or talk to your lender.
Some HELOCs have balloon payments, meaning that your
monthly payment continues to be interest-only until, at maturity,
you pay off the outstanding principal balance. Other HELOCs are
structured so that after an initial interest-only period, the loan
becomes self-amortizing, meaning that the monthly payment becomes
large enough to cover both interest expense and the reduction of
principal balance over the remaining term of the loan.
If you have a HELOC that is interest-only in the first
10 years, and self-amortizing in the second 10 years, you'll have
the loan paid off at maturity, 20 years from now, unless you pay
it off sooner.
Some HELOCs are structured so they can be converted
into a fixed-rate home equity loan. If that was your original intent,
you may want to talk to your lender about whether they offer a conversion
feature.
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the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
