Many home equity lines offer an interest-only feature. Interest-only HELOCs are risky to the borrower; however they do provide more manageable monthly payments during the first few years.

Here’s how these credit lines work:

First - The interest-only HELOC is opened. The borrower agrees to a set number of years for the withdrawal period and a set number of years or a balloon payment for the repayment period.

Second - During the withdrawal period, the borrower can draw on the line whenever he chooses. His monthly bills are interest-only. If he wants to pay down the line, he may choose to make additional principal payments.

Third - When the withdrawal period ends, the repayment period begins. The borrower can no longer draw on the HELOC and must make both principal and interest payments each month. If a balloon payment is required, the borrower must pay the remaining amount owed in one lump sum. Borrowers who cannot or would prefer not to make these large payments may be able to refinance their loans and begin the process again. Their refinanced HELOC may also offer an interest-only withdrawal period.

Many borrowers choose interest-only HELOCs because of their low initial payments. However, it’s important to keep the risks in mind. As we’ve seen during the recent mortgage crisis, banks do change their terms and not everyone is able to refinance.

If you are unable to refinance your interest-only HELOC at the beginning of the repayment period, you may be stuck with large monthly payments or a massive one-time balloon payment. If you don’t meet these obligations your HELOC lender may be able to foreclose on your property and peruse you in court. Since HELOCs are almost always recourse loans, you will be personally liable for the unpaid debt, even if your property is sold.

See Also:

How a HELOC Works

HELOC Foreclosure

Tags | Heloc, heloc freeze, home equity loan