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.
It was just two short years ago that several major banks stopped offering HELOCs or home equity lines of credit. Wells Fargo and JP Morgan Chase were the most notable lenders who cited an uncertain economy in the early days of the Covid-19 pandemic as the rationale for hitting the pause button on home equity loans.
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.
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.
This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer Home Equity Loans nor Home Equity Lines of Credit (HELOC) at this time. Please visit our HELOC page for future updates.
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.
Rates could fall even further in 2025
Considering that rates on this product were in the 9% range in 2024, it's not inconceivable that they'll fall in to the 7% range before year's end – putting money directly back into the pockets of homeowners. Get started with a HELOC online today.
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.
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.
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 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.
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.
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.
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. Demand for these loans is low, but a few big banks have started offering them again.
Key takeaways. To qualify for a home equity loan or line of credit, you'll typically need at least 20 percent equity in your home. Some lenders allow 15 percent. You'll also need a solid credit score and acceptable debt-to-income (DTI) ratio.
One common use of HELOC funds is to consolidate credit card debt or pay off other high-interest debts. As mentioned, HELOCs traditionally carry lower interest rates than credit cards and other similar lines of credit. This is an advantage for homeowners who are currently trying to pay down debts.
Some lenders will charge prepayment penalties if you pay off your loan in the first three to five years of the repayment period. Whether you plan to pay off your HELOC when you sell your home, are refinancing or experience a financial windfall, a prepayment penalty could be an unexpected charge.
If you decide to cancel, you must inform the lender in writing. You may not cancel by phone or in a face-to-face conversation with the lender. Mail or deliver your written notice before midnight of the third business day.
If you've taken out a home equity loan (or home equity line of credit) against your home, you can still sell it. If you do so, you will need to pay back the remainder of your loan, and most people use the money generated from the property sale to do that.