Your HELOC could be frozen
Your lender could institute a HELOC freeze — that is, limit you to what you've already borrowed, regardless of the total amount of your line of credit.
While home loan interest rates overall have risen dramatically since 2022, HELOC rates still tend to be lower than those on credit cards and personal loans. If you qualify for the best rates, a HELOC can be a less expensive way to consolidate debt or finance a home renovation.
Since the end of September, HELOCs have been trading below 9 percent and, along with home equity loans, they're forecast to retreat further in 2024. At its Dec. 17-18 meeting, the Federal Reserve slashed interest rates by a quarter point, its third consecutive rate cut since September 2024.
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.
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.
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.
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.
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.
Once the draw period is over, the HELOC will transition to the repayment period. At this point, you can't borrow against the line of credit anymore, and you'll start paying back what you borrowed. You'll make monthly payments that include both principal and interest, over a set term, often as long as 20 years.
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.
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.
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're using your home as collateral. If you can't keep up with your monthly payments, you could lose your home to foreclosure. Rates are often variable. HELOC interest rates move up and down when the prime rate rises or falls, which may make it difficult to project what your monthly payments will be in the future.
Borrowers can also send a HELOC freeze letter to their lender. For example, you might request to freeze your HELOC if you're planning to sell your home or want to limit access to the account for budgeting purposes. In this case, you'll need to provide any forms or documentation required by your lender.
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.
HELOC rates are variable
They're already down by almost two full percentage points after starting 2024 around 10%. So, not only can you secure a lower rate now, but it may become even cheaper in the weeks and months to come. Get started with a low-rate HELOC here now.
HELOC rates are tied to the prime rate. The prime rate skyrocketed from 3.25% in early 2022 to 8.5% in October 2023, where it stands today. Someone with a $100,000 HELOC at prime saw their payment jump from $270 to $750 per month. New HELOC borrowers will likely see their payments drop in 2024 and beyond.
If you don't repay the line of credit as agreed, your lender can foreclose on your home. Lenders must disclose the costs and terms of a HELOC. In most cases, they must do so when they give you an application.
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.
Fannie Mae: Rates Will Average 6.4% in 2025 and 6.1% in 2026. The December Housing Forecast from Fannie Mae puts the average 30-year fixed rate at 6.6% in the beginning of 2025, declining to 6.1% in the first quarter of 2026.
If the market has taken a downturn and the value of your house has diminished, your equity is affected as well. When this happens, your lender can enforce a HELOC reduction so that your borrowing limit is based on just the equity that remains.
For example, if you're remodeling and need to transfer $20,000 from your home equity line of credit (in one institution) to your bank account (in a different institution), you can write a check to yourself to transfer the money.
Home equity loans use your home as collateral. You could lose your home if you can't keep up with your loan payments. Home equity loans should only be used to add to your home's value. If you've tapped too much equity and your home's value plummets, you could go underwater and be unable to move or sell your home.