4 borrowers who should open a HELOC (and 3 who shouldn't)
In today's high-rate and high home equity environment, home equity borrowing has become a popular option. Whether for debt consolidation, home renovations and repairs, or other short-term expenses, borrowing your home equity can be more beneficial than other alternatives.
Home equity borrowing can come in different forms, ranging from lump sum home equity loans to home equity lines of credit (HELOCs) to cash-out refinancing. But HELOCs, in particular, are in demand as they offer more flexibility with borrowing and repayment.
As a borrowing product, a HELOC can offer a lot of benefits. However, it's not a good fit for everyone. We spoke with home lending experts about who should and shouldn't open a HELOC right now. Below, we'll break down what to know.
Start by seeing how low of a HELOC interest rate you'd be eligible for here.
Borrowers who should open a HELOC
Homeowners have a unique opportunity to secure financing through a home equity line of credit. Instead of turning to high-interest loan products, they can tap the equity in their home.
"So many homeowners have equity because of the sharp appreciation of values we've experienced over the last five years," says Jason Lerner, branch manager at First Home Mortgage.
Here are some situations when it can make sense to look into HELOC borrowing:
If you're paying off high-interest debt
Americans collectively owed $1.21 trillion in credit card debt as of December 2024, according to data from the Federal Reserve Bank of New York. Credit card interest rates are also sky-high, currently north of 20%.
If you're knee-deep in credit card debt and struggling to pay it back because of the accumulated interest, a HELOC can be a powerful tool for debt consolidation. Average home equity line of credit interest rates are dropping and are currently 8.04% on a $30,000 HELOC, according to Bankrate. Being able to pay off high-interest debt and potentially cut your interest rate in half with a HELOC can be a smart move.
If you'll get a return on your investment
Lerner notes that a HELOC could make sense for homeowners or real estate professionals looking to renovate their home or invest in other properties.
"If someone knows that they're going to take on this extra debt but they're going to get a significant return on their investment…where they know they're going to put $10,000 or $20,000 into the home and get an increase in value of $40,000 or 50,000," says Lerner, a HELOC could be a smart financial move.
"Another really good candidate for a HELOC is somebody that owns their home and they've been in it for a while or maybe they purchased a home that just needs some upgrading, some sprucing up or some maintenance and repair," says Mark Worthington, a loan officer and branch manager at Churchill Mortgage.
If you're in a good financial position
Home equity borrowing is convenient for homeowners who might need some extra cash. But it's still money you have to pay back. As with any type of loan, being in a good financial position can make you a solid candidate for a HELOC.
"A HELOC is best for responsible borrowers with strong credit, a solid debt-to-income ratio, and sufficient home equity. It's a smart option for homeowners who need access to capital but want to avoid the high interest rates of credit cards or the hassle of refinancing," says Dr. Sean Wilkoff, an assistant professor of finance at the University of Nevada, Reno.
If you have a short-term expense
A home equity line of credit has a draw period and a repayment period. In some cases, the draw period could be 10 years and the repayment period could be up to 20 years. While that might sound beneficial, you could be in debt for a long time. You also can't see into the future and know where you'll be financially in a decade.
Because of that, Lerner says that borrowers who are dealing with a short-term expense and planning to repay the HELOC quickly could be good candidates for this type of financing.
Borrowers who should reconsider a HELOC
A HELOC is a flexible financing tool, making it an attractive option for borrowing. However, not everyone is a good fit for a HELOC. Here are some examples of borrowers who should likely reconsider a HELOC:
If you're already overextended
Inflation is affecting everyone's budget. But borrowers who don't have any breathing room in their budget or are already overextended with payment obligations shouldn't open a HELOC.
"If you're unable to comfortably repay the borrowed amount, it can quickly become a financial burden. Borrowers who wouldn't feel secure putting the expense on a credit card should think twice before using their home as collateral. Additionally, if covering the closing costs is a stretch or you don't fully understand how variable interest rates work, a HELOC may not be the right choice," says Wilkoff.
If you have concerns about a variable rate
Home equity line of credit interest rates are generally variable. That means your rate can go up or down depending on economic conditions and what's happening with the prime rate. If you have concerns about a variable rate or your payments changing, a HELOC might not be the best tool. However, some lenders do offer a fixed-rate option.
On the other hand, most home equity loan interest rates are fixed, which can help with budgeting as payments stay the same.
If you're in a debt cycle
Debt consolidation is one of the best ways to use a HELOC. But Worthington notes it's only a good idea if you've changed your financial habits and circumstances that led to the debt in the first place.
"I caution when we use a HELOC for debt consolidation. It is a lower interest rate than you can get on virtually every other kind of debt, particularly consumer debt when it's related to credit cards. However, there's often a cycle," says Worthington.
Until you've addressed the root cause, borrowing more could potentially keep you in a debt cycle that's tough to climb out of.
The bottom line
A HELOC can be a useful tool in a variety of situations, but it's not for everyone. If you're in a solid financial position and clear on how a HELOC will help you, Worthington suggests speaking to more than one financial institution to compare options. To review rates and terms, you can check HELOC options from home lenders and financial institutions.
While it's important to have a clear vision of how you'll use the funds, it's even more important to know how you plan to repay what you borrow.
"I definitely would say to have a plan for repayment for anyone who opens up a HELOC," says Lerner.
