Is a HELOC a good idea? Pros and cons of home equity lines of credit

For homeowners carrying high-interest debt or facing a major expense, a home equity line of credit could be a practical tool. Before applying for one, it’s important to understand the HELOC pros and cons, and how they apply to your situation. This will help you borrow with confidence. Here’s how HELOCs work, the situations where they tend to make sense, and a framework to help you decide if one is a good fit for your financial picture.

What is a HELOC and how does it work?

A home equity line of credit (HELOC) is a revolving line of credit secured by your home. It works in two phases: a draw period, during which you borrow, repay, and borrow again up to your credit limit, and a repayment period, during which you pay back the remaining balance. Repayment periods typically range from 10 to 30 years depending on your lender and the term you choose.

Most HELOCs have variable interest rates, which means your payment could change over time as rates change. It’s possible to find a fixed-rate HELOC with an interest rate that’s set on day one and never changes. Achieve Loans offers a fixed-rate HELOC. Because a HELOC is secured by your home, lenders may offer lower rates compared to unsecured options like most credit cards and personal loans.

Pros of a HELOC

A HELOC offers several potential advantages for homeowners who have equity.

Lower interest rates

Your home secures the HELOC. If you don’t repay the loan, you could lose your home. That security gives the lender a financial safety net, and lenders typically pass some of that reduced risk on to you in the form of lower interest rates. For borrowers carrying high-interest debt, consolidating into a HELOC with a lower rate could reduce your total interest costs.

Flexibility and you only pay interest on what you use

You only pay interest on the amount you owe, even if that’s not your full credit limit. You could use a HELOC for a range of purposes, including home improvements, debt consolidation, medical costs, and education expenses. You can borrow, repay, and borrow again during the draw period as your needs change.

High loan limits

Because a HELOC is based on available home equity, upper loan limits could be significantly higher than what you’d find with an unsecured personal loan or credit card. For homeowners with sufficient equity, that could mean access to a large amount of money that could be used to cover consolidate multiple debts or fund other major expenses, like larger home improvements.

Possible tax advantage

If you use the funds for home improvements on the property you borrowed against, the interest could be tax-deductible. Talk to a tax advisor about what applies to your situation.

Cons of a HELOC

Before you decide if a HELOC is a good idea for your situation, weigh these key factors. 

Variable rate risk

Most HELOCs have variable interest rates, so your payment could increase if rates rise.  Your payment amount could change during the draw period if you borrow more or pay down your balance, but not because of rate fluctuations. With a fixed-rate HELOC, your interest rate remains the same for the life of the loan. Achieve Loans offers fixed-rate HELOCs. 

Your home is collateral

Your home secures the loan. This is the trade-off that makes lower rates possible. Lenders take on less risk, so they charge less, but falling behind on payments could have severe consequences. If you default on a HELOC, you could lose your home. 

Reduced equity cushion

Every dollar you borrow against your home reduces the equity you’ve built. If property values dip or your borrowing needs grow, having less equity could limit your future options around refinancing, selling, or borrowing again.

Potential to run up a balance

Because a HELOC is revolving credit, you can borrow, repay, and borrow again during the draw period. That flexibility is a strength, and a risk. Without a clear plan, it’s possible to accumulate a larger balance than you intended. Also, some lenders offer interest-only payments during the draw period, which means the balance you owe won’t go down even if you make payments for years. 

Additional costs and fees

Like most mortgages, HELOCs come with closing costs that could include origination fees, appraisal fees, and other charges. These costs vary by lender, so factor them into your total cost of borrowing.

Pros and cons of HELOC loans at a glance

When is a HELOC a good idea?

A HELOC could be a good choice when you have sufficient equity in your home, stable income, and a repayment plan in place. Two of the most common situations where a HELOC tends to make sense:

Home improvements. Renovations can increase your home’s value, and the interest you pay could be tax-deductible. A HELOC’s revolving draw period is especially useful when you’re tackling projects over time and don’t know exactly how much you’ll spend upfront.

Consolidating higher-interest debt. If you’re paying high interest rates on credit cards or other unsecured debt, rolling those balances into a HELOC at a lower rate could reduce your monthly payments and your total interest cost.

Other ways to borrow against home equity

If a revolving line of credit does not fit your needs, there are other alternatives worth comparing.

• Home equity loan. A home equity loan is a one-time loan with a fixed interest rate and fixed monthly payments. It’s something to consider when you know exactly how much you need upfront. Like a HELOC, a home equity loan is secured by your home and has various pros and cons to consider before applying.

• Cash-out refinance mortgage. A cash-out refinance loan replaces your existing mortgage with a new, larger loan and gives you the difference in cash. This option could make sense if you also want to change your mortgage rate or term.

Deciding on whether a HELOC is a good idea

Only you can weigh the pros and cons of a HELOC against your own priorities. A few questions could help you get closer to a decision. 

• Why are you borrowing? Renovations for the home or consolidating high interest debt are common reasons people use a HELOC. 

• How long do you expect to own your home? A HELOC typically makes more sense if you intend to remain for several years, since closing costs and fees take time to recoup. 

• Is your income stable? Many lenders review this when considering applications, and it’s also helpful to know how you’ll pay off the loan. 

• Can you comfortably afford the payment? Ensuring you aren’t stretching yourself too thin each month could help reduce financial stress.

You have the option to talk to a loan consultant at Achieve Loans to find out if you prequalify. It only takes a few minutes, and it won’t affect your credit score.