How to determine HELOC affordability in today's changing rate climate

CBS News

03-06-2025

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Before taking out a HELOC, it's important to determine whether you can actually afford this type of borrowing, both now and in the long term.
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The Federal Reserve is dealing with a delicate balancing act, trying to do what's necessary to lower inflation without wreaking havoc on the economy. In pursuit of those economic goals, the Fed has maintained the federal funds rate at its current level throughout 2025 to counteract the inflation that has plagued Americans over the past several years. While the hope is that this strategy will smooth things out in the long term, borrowers are bearing the brunt of this choice in the short term.
The Fed rate impacts the interest rates on various types of loans, and today's higher-than-average Fed rate has increased the cost of borrowing. With credit card interest rates averaging around 22% and personal loans at 12%, home equity lines of credit (HELOCs) have become a lower-cost alternative. Average HELOC interest rates come in much lower at 8.14% currently after falling below 8% in early April.
While that rate is more borrower-friendly, HELOCs have variable interest rates, which can make the payments unpredictable. So, before opening a HELOC, borrowers need to consider how much they can truly afford. We spoke with home lending experts on how to determine HELOC affordability in today's uncertain and changing rate climate.
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How to determine HELOC affordability in today's changing rate climate
Any time you borrow, you need to make sure you can fulfill your repayment obligations. For HELOC borrowers who use their home as collateral, that's even more important to stave off a potential foreclosure. In that way, the HELOC risks are important to consider as the stakes are high.
"Step one will be what the bank is willing to lend you. But while that's a great barometer to say, 'Okay, I'm qualified,' it doesn't necessarily mean that the individual could afford it, and that it makes sense for them. So they have to do their own calculations," says Shmuel Shayowitz, president and chief lending officer at Approved Funding, a licensed mortgage bank.
If you're a current or prospective HELOC borrower, here are some ways to find out what you can comfortably afford.
Be conservative about tapping in
A HELOC allows homeowners to tap their home equity to borrow funds. Considering the average home equity amount is $313,000, homeowners may have access to higher loan limits than some alternatives at better interest rates. However, because HELOC rates are variable, it's important to be conservative so you have room in your budget for any changes.
"I think they should think worst-case scenario. I think it never hurts somebody to be thinking conservatively when you're talking about rates that move, let alone rates that can move every month," says Karen Mayfield, national head of originations at Multiply Mortgage, a mortgage-as-a-benefit provider.
To help you determine your HELOC affordability, do several exercises and calculate how your payments might change if rates change.
"Whatever the interest rate is you're being offered by the lender that you've chosen to go with, I think you should increase that rate by 1% and see how much your payment changes and whether you feel comfortable with that. And then, if you want to be really conservative, increase it by 2%," adds Mayfield.
Find out how affordable a HELOC could be today.
Know how much you need
The great thing about a HELOC is the flexibility. Like a credit card, you can access some of the funds up to your set limit, repay and use the funds again while you're in the draw period. While that's convenient, it can be a slippery slope if you're unclear on how you intend to use the HELOC or are unsure how much you need.
Whether you're starting a kitchen renovation you've been putting off or consolidating high-interest debt, know how much you need and try to stick to that amount. So even if you go after a higher line of credit, you're sticking to a plan and only borrowing the home equity amount you need.
"What I will always remind people of is just because you asked for, let's say, a $200,000 line of credit doesn't mean you need to spend $200,000. You don't even have to spend $2,000," says Mayfield.
Decide if you can pay more than the minimum
HELOCs are a unique borrowing tool in that borrowers are typically only required to pay the interest — not the principal — during the draw period. That could potentially be up to 10 years. After the draw period ends, borrowers transition to the repayment period, resulting in a significant jump in the payments, as both the principal and interest must be repaid.
If you don't carefully plan for this, it could put a major strain on your budget. That's why it's key to look at your ability to pay more than the minimum when determining HELOC affordability. Paying more than the minimum can help you chip away at your balance and reduce borrowing costs.
"When possible, a person can and should pay back principal," Shayowitz says. That can make HELOC repayment more manageable and save you money over the life of the loan. Plus, doing this with a HELOC can still provide a safety net.
"Even if you do prepay the principal, you could always draw upon it if you need it later on in the future," adds Shayowitz.
The bottom line
In today's high-rate climate, a HELOC can be a welcome alternative for homeowners who need access to funds, but it's important to determine HELOC affordability as it has a variable rate that changes. We're in an uncertain rate environment, so you want to be prepared and a well-informed borrower.
If a fixed-rate product would be better for you and your budget, another option to look into is a home equity loan. This type of borrowing is not as flexible as a HELOC, as it provides a one-time lump sum of money, but the fixed home equity loan interest rates provide more predictable payments.
Before opening a HELOC or taking out a home equity loan, review APRs, terms and fees with various home equity lenders. Understand home equity risks when taking on this type of financing and have a plan to tackle repayment for the best results.