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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 are the pros and cons you should consider before taking out a HELOC.
What is a HELOC?
HELOCs let you turn a portion of your home equity into a line of credit, which functions much like a credit card.
During the 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.
HELOC pros and cons: At a glance
HELOCs offer homeowners a wide range of benefits. But they also have some notable drawbacks. Make sure you consider these before taking out a HELOC on your home.
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HELOC pros
Here are more details about the advantages of HELOCs.
1. You can withdraw funds for many years
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."
2. You only pay interest on what you borrow
Another perk of HELOCs is that 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.
3. You can use the funds however you like
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."
4. High loan limits
Depending on how much equity you have in your home, HELOCs can potentially offer access to very large sums of money. 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.
5. Payments start out low
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.
6. Interest may be tax deductible
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.
HELOC cons
Here are more details on the downsides of HELOCs.
1. Rates are variable
HELOCs have variable interest rates, which means the rate you're charged can change based on where current HELOC rates are at. 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."
2. Risk of payment shock later on
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.
3. Your home is on the line
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.
4. There may be prepayment penalties
Some lenders charge fees if you close your HELOC too quickly after opening it. In some cases, a lender may also charge you for any closing costs it covered on your behalf.
"HELOCs are best-suited for homeowners that plan to remain in the property for a few years, as some lenders will charge prepayment penalties if the loan is closed in the first two to three years," Boyd says.
5. You may pay ongoing fees
HELOCs often have annual maintenance fees, transaction fees, and other ongoing costs you'll need to pay throughout your loan term. There may even be fees for inactivity if you go too long without withdrawing funds.
HELOC pros and cons FAQs
What's the difference between a HELOC and home equity loan?
A HELOC is a line of credit secured by your home. You can withdraw and repay funds many times over the draw period — usually 10 to 15 years. Home equity loans give a homeowner an upfront, lump-sum payment and are not replenishable; payments start immediately after. Both allow you to turn your home equity into cash.
What are the requirements for a HELOC?
The exact requirements for a HELOC vary by lender, but you can usually expect to need a credit score in the mid-600s or higher, at least 10% to 15% equity in your home, and a low debt-to-income ratio, meaning your existing loan and debt payments don't take up too much of your monthly income.
How can I get a HELOC?
You can get a HELOC through many banks, credit unions, mortgage lenders, and online lenders. You'll need to fill out an application, agree to a credit check, and submit some financial documentation. The lender may also order a home appraisal to confirm your property's value.
Is a HELOC a second mortgage?
A HELOC is typically a second mortgage. The term "second mortgage" simply means the lender has a secondary right to the property if you default on your loan (the primary right goes to your main mortgage lender). If you no longer have a primary mortgage — meaning you own your home outright — it's possible for a HELOC to be a first mortgage instead.
Is there a downside to getting a HELOC?
Taking money out of the equity you have in your home is risky, and because HELOCs have variable rates, it could become unexpectedly expensive if rates increase. Be sure to understand how much the HELOC could end up costing you, both on a monthly basis and overall, before you close.
Is it worth it to take out a HELOC?
Taking out a HELOC may be worth it if it can ultimately help put you in a better financial position. For example, some borrowers use a HELOC to consolidate high-interest debt, making it easier and less expensive to pay down. Or a HELOC can be used for value-adding home improvements, helping to boost the wealth you have in your home.
What is the monthly payment on a $50,000 HELOC?
How much your monthly HELOC payment will be depends on a few different factors, including your rate, the term length, and whether you're in the draw period or repayment period of the HELOC. A $50,000 HELOC at current rates might cost anywhere between $300 and $600 per month.