When Do Interest Only Home Equity Loans Work Best?

Interest only home equity loans do not require you pay down the principal loan amount with your monthly payments. Instead, you will only be required to pay off the interest that has accumulated each month. This makes the monthly payments low, but you also fail to reduce your debt loan and gain back the equity in your home. Because of this, these loans only work in a few situations.

Do Not Spend Principal

Though rare, there are some situations that would require you to have the liquidity of a home equity loan but not spend the cash. For example, if you are securing a small business loan, you may need to secure the loan with a savings account or show a large sum in your bank account. As such, you can liquidate some of your home equity. You will never have to spend this money, however, and it can remain in the account untouched.

Small Initial Loan Amount

If the sum you are collateralizing for a home equity loan is very small, you can likely pay it off at a given time in the future. As such, you can plan on paying interest only for a year or two and then paying down the balance in a lump sum.

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