Is a HELOC a good idea? Pros and cons to consider.

Yahoo

2 days ago

A HELOC, or home equity line of credit, is a financing tool that lets you borrow money from your home equity (that's your home's value minus your current mortgage balance).
Your lender turns a portion of your home equity into a credit line. This functions much like a credit card, allowing you to withdraw money over an extended period of time — often 10 years — up to a maximum limit.
During that timeframe, called the draw period, you can withdraw money, spend it, and repay it as many times as you like, and you'll typically only make interest payments on what you spend. Once you enter the repayment period 10 or 20 years into the credit line, you will begin making full principal and interest payments to repay what you borrowed.
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Here's what to consider about whether it's the right financing option for you.
HELOCs function similarly to credit cards, but have much lower interest rates. HELOC rates are averaging just over 8% in June 2025. A credit card, though? That averages 21.37% — over twice as much. HELOCs also tend to have lower rates than personal loans. Right now, those average almost 12%.
For these reasons, a HELOC can be a smart choice for consolidating debt. If you have high credit card balances and are paying them off at a 21%+ interest rate, taking out an 8% HELOC and paying off those credit cards could save you thousands in interest over time.
When you borrow from your home equity, the lender uses your home as collateral. If you fail to make your payments, the company can foreclose on your home.
So it's critical to run the numbers and make sure you can afford your new HELOC payments — both now and down the line — to ensure you don't lose your home.
There are no restrictions on how you use the cash from your HELOC. While many people use HELOCs for home improvements or debt consolidation, you can also use the money to pay medical bills, cover your child's college tuition, fund a new business venture or investment, or even serve as a financial safety net.
HELOCs usually have variable interest rates, which move up and down based on market conditions. This means your monthly payment could rise, too.
If this is worrisome for you — or you have inconsistent income — look for a lender that offers rate lock periods. These allow you to convert a portion of your HELOC balance into a fixed interest rate at various points in your loan term.
Depending on how you use the money from your HELOC, you may be able to deduct the interest on the loan from your taxes. According to the IRS, you need to use the money to either 'buy, build, or substantially improve your home.' The property must also be your primary residence or second home.
HELOCs are a type of second mortgage that you take out in addition to your existing mortgage. That means a second monthly payment, a variable one at that.
A big perk of HELOCs is that they allow you to continue withdrawing money for a long period of time. So you could use some money now to build a backyard deck, pay it off (or not), and withdraw more later to refurbish a bathroom, and pull out more a few years down the line when your roof needs repairing.
This also makes HELOCs a good option for a financial safety net. You can take out the loan and simply leave it untapped until an emergency arises and you need the money.
Having access to cash can be helpful in an emergency, but if you tend to overspend or have a serious shopping habit, a HELOC could be risky.
With most loans, which give you a lump-sum payment, you start paying interest on the full balance right away. With a HELOC, you'll only pay interest on what you withdraw from the credit line — not the full limit.
So if you have a maximum borrowing limit of $75,000, but you only withdraw and use $5,000 the first year, you'll only pay interest on that $5,000.
Some HELOCs have closing costs. You'll likely pay an appraisal fee — around $400, according to Zillow — for the lender to confirm your home's value (and how much equity you have).
There may also be application fees, origination fees, title search fees, attorney fees, and more. Ask your lender for a full breakdown of the costs you'll be expected to cover.
If you're not sold on a HELOC, there are other ways to borrow from your equity.
If you don't like the idea of a variable interest rate, you might choose a home equity loan instead.
Cash-out refinancing can be an option if you don't want a second payment. This replaces your current mortgage with a larger one, pays off your old balance, and then gives you the difference back in cash. This can be a good idea if you're able to secure a better term or interest rate.
The main downside of a HELOC is that it uses your home as collateral, so if you don't make your payments, your lender could foreclose on your house. They also often have variable interest rates, which can make it hard to budget for your payments, and they add a second monthly mortgage payment to your budget.
The main difference is that with a home equity loan, you'd receive the $50,000 all at once. With the HELOC, you could withdraw from the $50,000 credit line over time as you need it.
A HELOC may not be a good idea if you're on a tight budget or have unpredictable income that could make it hard to make payments. It also might not be a good option if you'd be tempted to use the money unnecessarily.