Is a HELOC a Good Idea in 2024? Pros, Cons, and Alternatives (2024)

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• A home equity line of credit, or HELOC, is one way you can turn your home equity into cash.
• HELOCs let you withdraw funds as you need them and make interest-only payments on what you borrow.
• But the line of credit is secured by your house, and interest rates and monthly payments can fluctuate over time.

A home equity line of credit — more commonly referred to as a HELOC — is one option for homeowners looking to tap the value of their home for cash.

Unlike other options, though, HELOCs offer a line of credit, allowing you to withdraw, repay, and then withdraw more funds as needed over an extended period of time. While this can be the right strategy for some homeowners, there are drawbacks, too.

Here's what to consider before taking out a HELOC.

What is a HELOC?

A HELOC is one tool you can use to borrow from your home's equity. Home equity loans and cash-out refinances are other options if you need to turn your equity into cash.

The best HELOC lenders let you turn a portion of your home equity into a line of credit that functions like a credit card.

During a HELOC's draw period (usually 10 to 15 years), you can withdraw and replenish funds as you see fit, making interest-only payments in most cases. Then, once you enter the repayment period (typically 10 to 20 years), you will begin making monthly principal and interest payments to your lender.

Benefits of a HELOC

HELOCs offer homeowners a wide range of benefits. You'll enjoy:

Access to cash

One of the biggest benefits of a HELOC is that it allows you extended access to cash. You can withdraw $10,000 here, another $30,000 there, pay it back, and withdraw even more. This makes a HELOC great for covering recurring expenses (like tuition, for example) or unexpected repairs, medical bills, and other charges that might crop up in the future.

"This method can be used over and over again as the funds are paid back," says Esther Phillips, senior vice president and director of sales at Key Mortgage Services. "It's a good option if funds are only needed for a short period of time or you're unsure as to how much you need and when."

Depending on how much equity you have in your home, HELOCs can potentially offer access to very large sums of money, too. Some HELOC lenders actually offer up to $500,000 in funding — much more than most other financial products can provide.

As Adam Boyd, head of home equity lending at Citizens Bank, explains, "HELOCs generally offer larger loan amounts and lower interest rates than unsecured loans, lines of credit, and credit cards." How much you ultimately qualify for will depend on how much equity you have and your credit score.

Lower interest rates

HELOC interest rates tend to be lower than what you'll find on other financial products, like personal loans or credit cards, for example. Additionally, you only pay interest on the funds you actually withdraw. If your credit line is for $50,000, but you only use $20,000, you'll only be charged interest on that $20,000 — not the full line.

This helps to minimize your long-term interest costs, particularly compared to other loan options, which typically charge interest on your full loan amount from day one.

Interest-only payments

Most HELOCs require only interest payments during the draw period, which can keep the monthly cost low. This can be helpful if you're on a tight budget or need to preserve cash flow. Just keep in mind that your payments will increase to include interest and principal once you enter the repayment period.

Flexibility

There's no restriction on how you use the funds from a HELOC. Many homeowners use them for repairs and renovations, while others use them for expenses completely unrelated to their home — like taking a vacation or consolidating credit card debt.

"The major advantage of a HELOC is that it has the same flexibility of a credit card," says Deb Gontko Klein, a Chandler, Arizona, branch manager of Reliability in Lending at Primary Residential Mortgage Inc. "You're only making payments on what was used and can pay it off and use it again as needed for home improvements, remodeling, landscaping, your kid's college, or even paying off higher interest credit cards."

Potential tax deductibility

In some cases, you may be able to deduct your HELOC's annual interest costs on your federal tax return. This is only the case if you use the borrowed funds to "buy, build, or substantially improve your home," according to the IRS, so keep this in mind if you're aiming for a tax deduction.

"Interest paid on a home equity loan or HELOC for any other purpose, such as buying an investment property or consolidating debt, isn't tax deductible," says Heather Harmon, head of Opendoor Finance, an online mortgage broker.

Risks of a HELOC

However, HELOCs have downsides, too.

Variable interest rates

HELOCs have variable interest rates, which means the rate you're charged can change based on current HELOC rates. Typically, these rates are tied to the prime rate. When that rate rises or falls, the rate on your HELOC does, too. This can make budgeting for payments difficult, as it can change often.

"Prepare your budget for the worst case for payments," Klein says. "Estimate your payment figures with rates increasing another 1% to 2% so that you are well prepared when rates do rise."

Current economic climate

Though HELOCs allow for low, interest-only payments during the draw period, that's not always a good thing, especially if you withdraw large amounts of cash. In this case, you could find yourself facing a significant jump in payments once you enter the repayment period.

If interest rates rise, as they have for much of the past few years, you could also see a big payment jump.

Temptation to overspend

Since a HELOC works like a credit card, allowing you to withdraw money as needed for a long period of time, it can be easy to lose track of what you've spent or, worse, overspend entirely. This would mean paying much more in interest than you may have planned for — or facing monthly payments you can't handle once you enter the repayment period.

Risk of losing your home

HELOCs use your home as collateral. While this can alleviate some of the risk for the lender and allow it to offer lower rates and more favorable terms, it's also risky. If you don't make your payments, the lender can foreclose on your house to repay the debt.

"It's important to make sure you are prepared to manage your line of credit responsibly and have room in your budget for changing monthly payments," Harmon says.

Is a HELOC right for you?

Whether a HELOC is the right move for your finances depends on a few factors. You should consider the following before applying for a HELOC.

Financial discipline

How likely are you to use and manage your credit line responsibly? If you tend to overspend, a HELOC could be a dangerous venture.

Financial goals

What are your goals for borrowing the money? If it's to fund a one-time purchase or bill, HELOCs may not be the right choice. However, if you need to cover recurring costs or a project for which you don't have an end total (like an ongoing home renovation, for example), it might work perfectly.

Alternative financing options

You should also look at the other financial tools you have at your disposal. If a high-rate credit card or personal loan are your only alternatives for cash, then a HELOC can often be a more affordable choice. If you have savings on hand, though, taking out any kind of debt is ill-advised.

Consult with a financial advisor

If you're torn on whether a HELOC is a good move, consult a financial advisor. They can offer you personalized guidance and recommend the right product for your goals and budget.

FAQs

Conclusion

HELOCs can often be a smart financial tool for homeowners, but they also have risks.

Before getting a HELOC, consider what you need the funds for, your personal financial circ*mstances, and the other financial products you have at your disposal. And if you're not sure a HELOC is the right move, talk to a financial professional or loan officer.

Finally, make sure to compare your options before pursuing a HELOC. Rates, terms, qualifying requirements, and other factors can all vary from one lender to the next.