Understanding Your Home Equity Options
Interest-Only HELOC vs. Traditional HELOC vs. Home Equity Loan
Your home is more than just a place to live — it’s also a powerful financial asset. If you’re looking to tap into your home’s equity, you’ve likely come across several options: the Interest-Only HELOC, the traditional HELOC, and the Home Equity Loan. While they all allow you to borrow against your home’s value, each comes with its own structure, benefits, and ideal use cases.
Let’s break down the differences so you can choose the right solution for your financial goals.
What Is a HELOC?
A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by your home. It works much like a credit card — you can borrow, repay, and borrow again during the draw period.
There are two main types:
- Interest-Only HELOC
- Payment Structure: You pay only the interest on the amount you borrow during the draw period (usually 5 years).
- Flexibility: You can pay down any amount of principal at any time — giving you control over how quickly you reduce your balance.
- Best For: Short-term needs
- Traditional HELOC
- Payment Structure: Payments include both principal and interest from the start or after the draw period ends.
- Flexibility: Still flexible, but monthly payments may be higher than an interest-only HELOC.
- Best For: Ongoing expenses, renovations, or debt consolidation with a more structured repayment plan. Anyone who wants to begin paying down their debt on a structural payment plan.
What Is a Home Equity Loan?
A Home Equity Loan is a lump-sum loan secured by your home, separate from your primary mortgage.
- Payment Structure: Fixed interest rate and monthly payments of principal and interest over a set term.
- Flexibility: Less flexible — you receive the funds all at once and follow a fixed repayment schedule.
- Best For: Large one-time expenses like major renovations, tuition, or debt consolidation. Anyone who wants a fixed rate and payment.
Side-by-Side Comparison
| Feature | Interest-Only HELOC | Traditional HELOC | Home Equity Loan |
| Payment Structure | Interest-only during draw; full payments later | Principal & interest start immediately or after draw | Fixed monthly payments of principal & interest |
| Repayment Flexibility | High; pay any principal anytime during draw period | Flexible; can pay more than required | Less flexible; fixed schedule |
| Interest Rates | Variable, typically lower during draw | Variable, may be slightly higher | Fixed, typically higher than HELOCs |
| Access to Funds | Revolving credit line | Revolving credit line | Lump sum at closing |
| Best For | Short-term needs | Renovations, ongoing expenses, debt consolidation | Fixed-rate, one-time large expenses, debt consolidation |
Which Option Is Right for You?
- Choose an Interest-Only HELOC if you want maximum flexibility and lower initial payments.
- Choose a traditional HELOC if you prefer structured repayment with continued access to funds.
- Choose a Home Equity Loan if you need a lump sum and prefer predictable, fixed rates and payments.
*This article is for informational purposes only and does not constitute a commitment to lend. Terms and conditions apply. Interest-only payments do not reduce the principal balance. At the end of the interest-only period, full principal and interest payments will be required. Please review all disclosures carefully and consult with a loan specialist for full details.
Last Updated: August 1, 2025
