3 times you should get a HELOC (and 3 times you shouldn't)
If you own a home, you may have a significant amount of home equity. One common way to tap into it is by using a home equity line of credit (HELOC), which can be a smart option for several reasons.
For starters, HELOCs typically have competitive interest rates because they're backed by collateral: your home. And, as lines of credit, a HELOC allows you to borrow money during a draw period that lasts several years. Plus, the variable interest rates HELOCs come with may be an added benefit in today's rate climate.
On the other hand, HELOCs aren't always the best solution for your borrowing needs. There are times when HELOCs make sense, but in some cases, it may be better to consider other options.
Find out how affordable a HELOC can be today.
3 times you should get a HELOC (and 3 times you shouldn't)
Find out when you should and shouldn't tap into your home equity with a HELOC below.
3 times you should get a HELOC
HELOCs offer a flexible way to access your home's equity, and a HELOC may be useful at these times:
When you expect interest rates to fall
Interest rates are high at the moment, but today's high-rate environment won't last forever. The Federal Reserve kept rates paused at its March meeting, but experts expect the Fed to lower its benchmark interest rate later this year. Considering the variable nature of HELOC interest rates, you may be able to pay less in interest if you use one and rates decline in the future.
Compare your HELOC borrowing options now.
When you need a flexible borrowing option
A HELOC starts with a draw period that typically lasts several years. During this period, you'll be able to borrow from your line of credit up to the limit. That can be a valuable feature if you're not sure how much money you need, as you have the option to borrow against your credit limit as necessary.
And, you can access your HELOC credit line as many times as you need to. If you hit the limit on your credit line, you can pay the money back to reduce your HELOC balance and then borrow again.
When you want to limit your borrowing costs
When your draw period is over, your payments are based on the amount you borrowed from your credit line, plus interest and any other fees. You can keep your borrowing costs in line by limiting the amount of the credit line you use during the draw period or by paying back a portion of what you borrow before the draw period ends.
3 times you shouldn't get a HELOC
Here are three times when a HELOC may not be the best option.
When you need stability in your budget
HELOCs usually have variable rates, which could be a good thing if interest rates fall. But if interest rates head up, it could lead to paying more in interest on your line of credit. If increased borrowing costs could lead to financial hardship, a HELOC may not be your best option. In these cases, a home equity loan may be more fitting.
When you know how much money you need
If you know how much money you need to borrow, a home equity loan may be a better option than a HELOC. After all, the average home equity loan rate is lower than the average HELOC rate right now.
When you think interest rates could increase
Most experts agree that the Federal Reserve will reduce interest rates at some point in 2024, but nobody knows when rates will start to fall or by how much. And, it's unclear how long lower interest rates might last. If you think interest rates could rise over the longer term, the variable rate tied to a HELOC could be a drawback.
Learn more about your home equity borrowing options today.
The bottom line
There are times when HELOCs make sense and times when they don't. That all boils down to your needs and how this unique lending option meets them or fails to do so. If you're looking for a flexible borrowing option with a variable interest rate, a HELOC may be a good choice. But if you know how much money you need and want fixed borrowing costs, you may want to look at other options.
