Dear Dr. Don,
Is it true that on a home equity line of credit (as with an interest-only loan), one only pays the interest each month, and not part of the principal?
-- Louise Loanable
A home equity line of credit, or HELOC, is an interest-only product through the years of the loan term that the borrower can draw on the line of credit. For a HELOC, that means that the minimum monthly payment is the monthly interest expense on the loan.
You can choose to make a principal repayment, which will reduce next month's interest expense and increase the available credit line during the drawdown period.
When the draw period ends, the loan payment typically becomes self-amortizing over the remaining loan term. That means that the minimum monthly loan payment is no longer interest only. The payment is sized so that monthly payments over the remaining loan term are large enough to both cover the interest expense and to pay off the loan.
If you have a HELOC with a 20-year term and a 10-year draw, then after 10 years the loan becomes self-amortizing over the remaining 10-year repayment period and you can no longer draw against the line of credit.
One option at that point is to take out a new HELOC to refinance the old. The new loan will be interest-only during its draw period.
This isn't etched in stone. HELOC terms can vary based on the loan program. What is common is for the HELOC to be interest-only during the draw period.
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