A HELOC — or home equity line of credit — is a line of revolving credit that’s secured by your home. As home prices have risen recently, many borrowers now have record equity in their homes to borrow against. So some are considering a HELOC thanks to relatively low rates (see the lowest rates you could qualify for here) and the fact that you only have to withdraw the amount you want, rather than taking the money as a lump sum. But they’re not right for everyone, and they have risks, including the fact that if you don’t pay it off, you could lose your home. We asked experts to share the most important things to know about HELOCs before taking one out:
1. You might not be able to get as much money as you think
Just because you have equity in your home, doesn’t mean you can borrow against it. “Most lenders want borrowers to retain a 20% equity stake, so the total amount borrowed between your first mortgage and a home equity line of credit wouldn’t be able to exceed 80% of the home’s value. You may have 25% equity but only be able to borrow against a fraction of it,” says Greg McBride, chief financial analyst at Bankrate.
2. You should be careful about what you use a HELOC for
Lenders generally won’t ask what you’re planning to use the money for, but experts say the smartest uses for a HELOC include home improvements that increase the value of your home. On the flip side, if you’re planning to sell your home in the near future, you may want to pump the brakes on a HELOC because you’d have to pay off the balance of the loan when the home sells.
3. You might be in for a higher monthly payment soon
Most HELOCs have a variable rate so be mindful that HELOC rates can march higher. “As time goes on, your rate and your monthly payment may change even if you’re withdrawing the same amount of money every month. It’s likely that HELOC borrowers will end up with higher interest rates by the end of this year than what they currently face because the Fed has signaled that it will begin raising the Fed Funds rate starting in March,” says Jacob Channel, senior economic analyst at LendingTree.
So what might that actually look like? Holden Lewis, home and mortgages expert at NerdWallet says: “The Fed might hike rates four times this year for an increase of a full percentage point. On a $50,000 balance, …….