Home equity lines of credit (HELOCs) let you borrow against the equity you've built in your home up to a set credit line. With homeowners still feeling stuck in their homes—and HELOC interest rates dropping faster than mortgage rates—HELOCs can be a popular option for getting a relatively low-rate 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).
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.
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.
Based on those repayment terms and rates, here's how much you can expect to pay each month on a $100,000 home equity loan: 10-year fixed home equity loan at 8.50%: $1,239.86 per month. 15-year fixed home equity loan at 8.41%: $979.47 per month.
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.
While HELOCs can help pull you out of financial trouble, they can just as easily become risky money traps.
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.
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.
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.
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.
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.
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.
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.
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'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.
It's important to understand that most HELOCs offer variable interest rates, but borrowers sometimes can negotiate with the lender for a fixed interest rate for the remainder of the repayment period.
The bottom line is that a HELOC won't hurt your credit score much. It might even help it in the long run, provided you consistently make your payments on time. But a HELOC isn't the only borrowing option available to homeowners.
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.
Lenders base the loan amount on your home equity, credit score, and debt-to-income (DTI) ratio. 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.
Locking in your HELOC's interest rate might not be the best option in some instances. The most significant disadvantage can be that rates drop afterward. So if you lock in a competitive rate today, you could save yourself from higher rates in the future. But if rates drop, you miss out on a lower rate.
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.