If you’re considering using a HELOC, here’s how to decide if it makes sense for your financial situation.
A home equity line of credit (HELOC) can be a valuable tool – for the right homeowners. When weighing the pros and cons, applying them to your financial situation is key.
We consulted multiple experts to confirm the most important factors to consider. So, before researching the best HELOC lenders, ask yourself, “Is a HELOC a good idea?” Here’s how you can answer that question.
What is a HELOC?
With a traditional loan, you borrow a lump sum from a lender. With a HELOC, you can access a pool of money and borrow it based on your home’s equity. “It functions similarly to a credit card, giving you a revolving line of credit that you can draw from as needed, up to the preapproved limit,” explains Denya Macaluso, CMB, vice president of residential lending at MSU Federal Credit Union.
There’s a draw period, which is the set amount of time you must borrow against your HELOC before you must start paying it back. “During this time, you only pay interest on the amount you use, not the full limit. You can borrow, repay and borrow again – just like a credit card,” says Becky Conner-McDuffy, senior loan officer at Becky Conner Lending. When the repayment period begins, you can no longer borrow against your HELOC and you’ll start making monthly payments (principal and interest) to pay it back.
Who is a HELOC Good For?
A HELOC can be used for just about anything, but that doesn’t mean taking advantage of it for a personal shopping spree would be wise. The money can be taken out for home improvements, medical bills, a down payment on a second house, business expenses and even college. A HELOC is good for someone with a quality credit score, as they’ll likely get a lower interest rate. It’s imperative that someone who uses a HELOC feels comfortable with how much their monthly payment will be. Even if their mortgage is up to date with payments, missing HELOC payments can result in losing your home.
“A HELOC is a great second line of defense for emergencies,” says Bobbi Rebell, CFP, personal finance expert at BedCredit.org and author of Launching Financial Grownups. “One example might be an unexpected, but expensive, home repair or a large purchase that you can’t pay for at the moment but want to avoid putting on a credit card where you will pay very high interest rates. They are especially good for home improvements because there can be potential tax benefits.”
Who Should Avoid Getting a HELOC?
Access to a lot of money can be tempting, so someone without discipline should proceed cautiously. “Remember, you are putting your home up as collateral, so make sure you have a solid amount of equity in your home. If you don’t repay the money borrowed, you will not only pay interest, but you risk having your home taken away,” says Rebell.
“A consumer with unstable income should exercise caution when considering a HELOC, as income instability can create challenges in making on-time payments, potentially putting their home at risk,” advises Macaluso. “Additionally, those who are sensitive to changing interest rates may find the variable rates associated with HELOCs uncomfortable and might prefer the predictability of a fixed-rate product.”
Just because you own a home doesn’t mean you’ll qualify for a HELOC. But if you do, a HELOC might not be a good idea if you have minimal equity. So, you can explore other options, such as a home-equity loan, a personal loan, refinancing and a home equity agreement (HEA). What’s best for one person doesn’t necessarily translate to the next person, so look at your situation.
Why You Should Trust Us
Benzinga has been helping readers make smart financial decisions since 2010. Every month, 25 million readers rely on us to provide them with insight into financial markets, corporate and economic data and actionable ideas. Caitlyn Fitzpatrick, the author of this piece, is passionate about steering people in the right direction regarding their finances. She has been an editor and writer since 2014 and entered the commerce journalism world in 2017. Whether creating a gift guide or diving into the world of HELOCs, Fitzpatrick wants you to spend (and borrow) your money wisely.
For this story, we spoke with Denya Macaluso, CMB, vice president of residential lending at MSU Federal Credit Union, Becky Conner-McDuffy, senior loan officer at Becky Conner Lending and Bobbi Rebell, CFP, personal finance expert at BedCredit.org and author of Launching Financial Grownups. They used their years of real-world experience and reviewed the key factors to consider before deciding to use a HELOC.
FAQ
Is a HELOC a good idea for debt consolidation?
The answer isn’t the same across the board for all homeowners. Using a HELOC for debt consolidation can be a smart decision for those who plan to pay it back within 12 to 36 months, as monthly payments will be lower. However, since it’s like having a second mortgage, you need to be extremely confident you can meet those monthly payments, even when it goes from interest-only to principal and interest, because the bank could foreclose on your house even if your original mortgage is up to date.
“By consolidating multiple debts into a single, more affordable payment, many consumers find it easier to stay on top of their finances and pay down balances more efficiently,” says Macaluso.
Is there a downside to getting a HELOC?
One major thing to consider is that your interest rate could change over time, meaning, yes, it could go higher while you’re in the middle of paying off your HELOC. So, you must ensure you can afford your monthly payment even if that number increases. Plus – and we can’t stress this enough – defaulting on payments could lead to foreclosure. Be honest with yourself about your financial discipline before taking on a HELOC.
What is the current HELOC interest rate?
“HELOCs are based on the Prime Rate and there are adjustments added to that according to credit score, type of residence and loan-to-value ratio,” says Conner-McDuffy. “As of Jan. 15, 2025, the Prime Rate is 7.5%. Your HELOC rate can be anywhere from 7.5% to 12.5%, depending on the lender and the mentioned variables.”
Sources
- Denya Macaluso, CMB, vice president of residential lending at MSU Federal Credit Union
- Becky Conner-McDuffy, senior loan officer at Becky Conner Lending
- Bobbi Rebell, CFP, personal finance expert at BedCredit.org and author of Launching Financial Grownups
About Caitlyn Fitzpatrick
Caitlyn Fitzpatrick has been a professional writer and editor since 2014 and entered the commerce journalism world in 2017. She’s passionate about helping readers make smart buying decisions by using data insights and interviewing experts. Most recently, Fitzpatrick was the Senior Shopping Editor at Trusted Media Brands, where she led affiliate content on Reader’s Digest. In addition to Benzinga, Fitzpatrick’s work can be found in a range of publications, including U.S. News & World Report’s 360 Reviews, Today’s Parent, Betches, WhatToWatch.com, PS (formerly Popsugar), and more.