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.
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.
Key takeaways
A lender has several reasons for freezing or reducing a customer's HELOC, including diminished market value and suspected inability to repay the loan.
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).
Lenders rarely approve loans if debt exceeds 43% of income, including mortgages, car, credit card, and student loans. If a borrower is already carrying a lot of debt, lenders may worry that they will struggle to make payments on the HELOC in addition to their other financial obligations.
The total outstanding balance on HELOCs has steadily increased since 2021. It reached $387 billion in Q3 of 2024, a $7 billion increase from the second quarter (Q2). More people are opening HELOC accounts.
Key Takeaways
HELOCs usually have two stages: a draw period and a repayment period. If your home value drops significantly, your lender might limit or freeze your credit line.
Equity is the value of your home minus the amount you owe on your mortgage. 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.
What is the monthly payment on a $50,000 HELOC? 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.
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.
In the wake of the Fed's recent cuts this year, a HELOC may be more beneficial than a home equity loan because the rate could drop more dramatically. Also, with a HELOC, you can draw funds as you need them, and you only have to pay interest on the funds you actually take out.
Risk of losing your home
HELOCs use your home as collateral. While this can alleviate some of the risk for the lender and allow it to offer lower rates and more favorable terms, it's also risky. If you don't make your payments, the lender can foreclose on your house to repay the debt.
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.
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.
If you take out a $50,000 home equity loan, you will receive all of the money at once and pay interest on the full amount. With a HELOC, you can withdraw money whenever you need it.
You can pay off your HELOC early, but be mindful of pre-payment fees, if any. If you have a Citizens HELOC, you're in luck as Citizens does not charge pre-payment fees. HELOCs allow you to make interest-only payments during the draw period, then transition to principal and interest payments during the repayment period.
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.
A mortgage will usually have a lower interest rate than a home equity loan or a HELOC. That's because a first mortgage takes first priority for repayment in the event of a default and therefore represents a lower risk to the lender than a home equity loan or a HELOC.
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.
Several major banks stopped offering reverse mortgages around 2011, possibly as a result of the 2008 financial crisis. It also appears that reverse mortgages were simply too risky for these banks. Early in the pandemic, several big banks stopped offering HELOCs, citing unpredictable market conditions.
The average home equity loan interest rate (as of January 8, 2025) is 8.43% and slightly higher for different repayment periods (8.55% for a 10-year one and 8.49% for a 15-year repayment period). So if you can get a rate under any of those three, you can consider it a "good" one right now.
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.