HELOC: Interest Only vs Principal + Interest


In today’s Quick Tip, we go over Interest Only vs Principal + Interest HELOC. What’s the difference? Which one is better for your situation? We break it down in 3 minutes!

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Transcript

Hey Cash Flow Maximizers.
Today’s quick tip has to do with HELOCs. Should you get and interest only HELOC or an interest plus principal payment and what’s the difference?
So, essentially, there’s no difference between those two other than how much you’re going to be required to pay each month. Structurally it’s just going to depend on what your bank requires or what your bank allows as far as what you’re able to put in and take out, how long you’re going to be able to put in and take out, from your HELOC.
But, whether it’s interest only or principal plus interest, the only difference it’s going to make is on your credit report. It’s going to show a higher payment that’s required, if you have the premium plus interest loan.
Now, that will only make a difference if you’re shopping for like a home loan or you’re shopping for a car loan, where they’re looking at your debt to income ratio. Your debt to income ratio is affected by what your credit report shows is your minimum payments due.
Now, if you don’t have any balance on your home equity line of credit, then it doesn’t really matter at that point. But, as soon as you get a balance on there, with a principal plus interest home equity line of credit, your minimum payment is going to be higher.
As far as dynamic banking goes and how we utilize home equity lines of credit to attack debt, and to eliminate debt really quickly, it doesn’t matter if you have an interest only loan or a principal plus interest. Because we do what’s called paycheck parking and you’re going to put in more than enough income each month to overcome whatever that minimum payment is.
So, essentially, we ignore whatever the bank requires for that minimum payment. Case in point, my home equity line of credit, the minimum payment is 1% of the balance. So, if I have a $70,000 balance on my home equity line of credit, my payment is gonna be $700 that month. Well, if we put all of our income flowing through there each month, we’re going to have thousands of dollars going in there and showing as a payment. So, the minimum payment required doesn’t matter a single bit to us.
So, interest only or principal plus interest? The choice is yours. It’s going to depend on if you anticipate having to get a loan that they’re going to be looking at your debt to income ratio in the near future.
Thanks for watching. I hope that helps. If you want to find out more about home equity lines of credit, check out this video here and this video here.
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