HELOC Advice That Works

A HELOC, or Home Equity Line of Credit, lets you borrow money against the equity you have built up in your home. Many people have tapped into their home equity over the past few decades, especially since the economy has struggled to recover from the housing crisis.

But is a HELOC a good idea? People contact us asking for information about HELOC, advice about how to proceed, and to get free one-on-one counseling about their unique situation. Because no two situations are identical, we caution that any advice we give here on the web site should be backed up by a free counseling session; a HUD-approved housing counselor can go beyond generic advice and give you specific information pertaining to your situation.

In the early part of the 21st century, many people were taking advantage of rising real estate prices to pay off their credit card debt. We cautioned against it at the time, and were proven right when the housing bubble burst in 2007.

Does that mean we still caution against a HELOC? We would say if you’re planning to use home equity to pay off some other kind of debt, like credit cards, then you shouldn’t do it. But a HELOC can have advantages for careful consumers.

A HELOC isn’t a conventional loan, it’s a line of credit. Like your credit cards, you can use some of your line of credit, repay the balance, and then borrow again. It’s not a one-time loan. It can be a good option because of this ability to re-borrow as long as the line of credit is open. It also carries a lower interest rate than many credit cards.

There are also tax advantages; the interest is part of your home mortgage, so it’s tax-deductible. And you only pay interest on the credit you’re actually using, rather than the whole loan amount.

However, the payments can vary more wildly than monthly credit card bills, as HELOCs are tied to the prime rate, which can go up and down quickly. If the prime rate goes up, your interest will go up immediately—with no limit or waiting period. HELOCs also carry extra fees that other credit products don’t have.

Our best advice is to only take advantage of a HELOC if you’re fully prepared and know precisely what you want to do with the money. It might especially be a good idea if the money can be used to improve your home and increase its value. But we don’t recommend getting a HELOC just because you need extra money. If you’re a homeowner, you’ve worked hard to build up equity and take full ownership of your property; don’t sacrifice all of that work for some quick cash.