Is a HELOC a Good Idea? The Simple Answer

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Lots of homeowners in the U.S. have lots of equity in their homes, and interest rates are now much higher than they used to be. As a result, HELOC’s (Home Equity Lines of Credit) have become more popular than they were a few years ago. But is it a good idea to get a HELOC?

A HELOC can be a good idea, but only for one thing:

Use a HELOC to improve your home. That’s the ONLY reason to get one.

HELOCs are best for home improvement

The reality is HELOCs can be a good standby for a rainy day. Let’s say you have to replace your HVAC and you take out a HELOC that you pay off in 36 months or less. That’s a good use of a HELOC.

HELOCs should ideally be used for fixing or renovating your house, not spending on other things or paying down other debts.

The pitfalls of a HELOC

Risk of overspending: HELOCs function like credit cards backed by your home’s equity. This can be tempting for impulsive spending, turning your home into a piggy bank rather than a stable asset.

Variable interest rates: Unlike a fixed-rate mortgage, HELOCs have variable interest rates tied to the prime rate. As interest rates rise, so do your monthly payments, potentially straining your budget.

Potential for foreclosure: If you can’t keep up with payments, you risk losing your home. Since a HELOC is secured by your house, delinquency could lead to foreclosure, a devastating financial consequence. This is the primary reason to avoid using a HELOC to pay down debt, like credit card debt. If you default on your credit card debt, they won’t foreclose on your home.

Better alternatives for some situations: Home equity loans, particularly from credit unions, are frequently a better alternative. These often have fixed interest rates for a set term, offering more predictable payments. They are ideal for specific needs like renovations.

Last Thought

HELOCs should be repaid quickly: If you do choose a HELOC, you should have a plan to repay it within a short timeframe, ideally 2-3 years. Anything longer introduces the risk of changing interest rates.

You can use our HELOC calculator to estimate your monthly payments and the total interest paid over the life of the loan. Additionally, you can also view a full amortization schedule and a dynamic line chart that visualizes your remaining loan balance over time.