Balances on home equity lines of credit, or HELOCs — a type of second mortgage that lets homeowners use their equity as collateral — are on the upswing, having risen 20 percent since 2021, according to a recent analysis by the Federal Reserve Bank of New York.
The bottom line. If you're looking for a relatively inexpensive way to borrow money in today's economy and don't want to delay by waiting for a lower rate, a HELOC could be the smart alternative. Rates are variable and likely to become lower as the interest rate climates continues to cool.
Plenty of articles posted after the housing crash as to the reason Wells and chase pulled out of the HELOC market. They simply are too risky for the banks, fears of a housing bubble, and too much negative press (that could cause downward pressure on the companies stocks).
Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $372 for an interest-only payment, or $448 for a principle-and-interest payment.
HELOC payment examples
For example, payments on a $100,000 HELOC with a 6% annual percentage rate (APR) may cost around $500 a month during a 10-year draw period when only interest payments are required. That jumps to approximately $1,110 a month when the 10-year repayment period begins.
On the downside, HELOCs have variable interest rates, so your repayments will increase if rates rise. Another risk: A HELOC uses your home as collateral, so if you don't repay what you borrow, the lender could foreclose on it.
The cuts have been a key factor driving HELOC rates, which are variable. HELOC rates fell from a high of 10.16 percent at the beginning of 2024 to an average 8.36 percent at the end of the year, according to Bankrate's national survey of lenders. Of course, more Fed cuts in 2025 could translate to further declines.
A loss in the value of your home:
When this happens, your lender can enforce a HELOC reduction so that your borrowing limit is based on just the equity that remains. If you are in a situation of negative equity, you will see an a HELOC freeze.
HELOCs in particular can be a trap. “Many homeowners find it difficult to stay disciplined in paying down the principal on their line of credit,” Bellas says. During the initial draw period, “most HELOCs only require you to pay down the interest every month, similar to how a credit card has a minimum payment.
Typically, HELOCs will have lower interest rates and greater payment flexibility, but if you need all the money at once, a home equity loan is better.
Key Takeaways
In a true financial emergency, a HELOC can provide lower-interest cash than other sources, such as credit cards and personal loans. Using a HELOC to fund a vacation, buy a car, pay off credit card debt, pay for college, or invest in real estate is not a good idea.
Bankrate Chief Financial Analyst Greg McBride, CFA, forecasts that HELOC rates will continue to decline in 2025, averaging 7.25 percent, their lowest level in three years.
Home equity lines of credit (HELOCs) generally have variable interest rates, which can eventually lead to higher monthly payments. HELOC borrowers who initially make interest-only payments face dramatically higher monthly payments once the interest-only period expires.
While not at pre-pandemic levels, interest rates on home equity loans and HELOCs are slowly improving. The average home equity loan interest rate is currently 8.41%, while the average HELOC interest rate is 8.52% (as of December 19, 2024). Still, the only economic constant is change.
These credit lines gained popularity in the 1980s due to high home appreciation and tax reform initiatives, but the Great Recession and housing crisis of the mid-2000s caused HELOCs to no longer be offered by big banks because home equity was difficult to determine.
The simple way to do this is to decrease your charges or draw on the HELOC while increasing the amount of your monthly payments. Lowering the outstanding balance also decreases your loan-to-debt ratio, which is attractive to lenders and can help you meet your personal financial goals.
If you've built up enough equity in the property since you bought it and the value has increased, then selling shouldn't be too difficult – as long as you can make up any difference between what's owed on the HELOC and what your house sells for.
Consider a HELOC if you are confident you can keep up with the loan payments. If you fall behind or can't repay the loan on schedule, you could lose your home.
You can deduct interest on a home equity line of credit (HELOC), but only if you use the funds for home improvements. The introduction of the Tax Cuts and Jobs Act (TCJA) eliminated deductions on interest if you use the funds for anything else, such as to consolidate debt.
The average HELOC interest rate is currently 9.16%. If you took out a HELOC, and your interest rate remained the same for the life of the credit line (with a 15-year repayment period), you would pay $307.14 per month.
A home equity line of credit or HELOC is another type of second mortgage loan. Like a home equity loan, it's secured by the property, but there are some differences in how the two work. A HELOC is a line of credit that you can draw against as needed for a set period of time, typically up to 10 years.
But if your HELOC rate and payment stayed the same through the 15-year repayment period, your HELOC payments on a $60,000 balance at today's average interest rate of 9.18% would be $615 per month and you would pay $50,700.25 in total interest. Get the money you need with a home equity loan now.