A home equity line of credit (HELOC) is a flexible way for Colorado homeowners to borrow against the equity in your home. It works like a revolving line of credit, you can borrow what you need, when you need it, up to your approved limit. Many homeowners use HELOCs for home renovations, debt consolidation, education expenses or emergency costs.

An interest-only HELOC is a specific type of HELOC that allows you to make smaller payments at the beginning of your loan term. During the initial “draw period,” you can choose to pay only the interest on the amount you’ve borrowed, helping you manage your monthly budget and cash flow more easily.

 

How an Interest-Only HELOC Works

Just like a traditional HELOC, an interest-only HELOC has two main phases, the draw period and the repayment period. Here’s how they work.

Draw Period
During the draw period, typically 5 to 10 years, you can borrow funds as needed. During this time, you have the option to only pay the interest on what you’ve borrowed. You are not required to pay the principal during this phase.

Repayment Period
Once the draw period ends, the repayment period begins. You can’t borrow more funds, and your monthly payments will now include both principal and interest. This means your payments will increase compared to the earlier interest-only phase.

 

Interest-Only HELOC vs. Traditional HELOC

While both types of HELOCs let you borrow against your home’s equity; they differ in how payments are structured during the draw period. Here’s a quick comparison.

Interest-Only HELOC Structure

Draw Period Payments: You can choose to pay only the interest due, resulting in lower monthly payments.

Flexibility: Offers more short-term flexibility in your budget.

Payment Increase Later: Payments rise after the draw period ends, since you begin repaying principal.

Best for: Colorado homeowners who want lower initial payments or short-term flexibility

Traditional HELOC Structure

Draw Period Payments: You can choose to pay both interest and a portion of the principal each month, resulting in higher payments.

Flexibility: Builds equity faster since you’re paying down the balance right away.

Payment Increase Later: Payments stay more consistent over time.

Best for: Colorado homeowners who want to reduce their balance sooner and are comfortable with slightly higher payments.

To summarize, an interest-only HELOC provides breathing room early on, while a traditional HELOC focuses on long-term repayment stability. The right choice depends on your financial goals, cash flow and comfort level with changing payments.

 

Things to Keep in Mind

If you choose an interest-only HELOC, it’s important to plan for the repayment phase. Once the interest-only period ends, your payments will rise because you’ll start repaying principal too. Make sure your budget can adjust when that time comes. And remember, your home is the collateral, so staying current on payments protects your investment.

With any type of HELOC, the amount of cash you can borrow depends on the amount of equity in your home. Your home equity is calculated by subtracting your mortgage balance from your home’s current value. Generally, lenders allow you to access 80% of the amount of equity you have in your home. At Partner Colorado, we allow up to 85% LTV (loan to value) on most HELOCs. You can use our free online home equity calculator to determine how much equity could be available to you.

An interest-only HELOC can be a smart choice if you want lower payments upfront and flexibility to manage cash flow. However, understanding how it differs from a traditional HELOC helps you make the right financial decision for your needs.

If you’re ready to explore your options, Partner Colorado is here to help. Our experienced team can walk you through the details and help you find the HELOC that best fits your goals.