Good Reasons to Get a HELOC - NerdWallet (2024)

FAQs

Why would someone need a HELOC? ›

Lower interest rates

While home-loan interest rates overall have risen dramatically since 2022, HELOC rates still tend to be lower than those on credit cards and personal loans. If you qualify for the best rates, a HELOC can be a less expensive way to consolidate debt or finance a home renovation.

Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $375 for an interest-only payment, or $450 for a principle-and-interest payment.

You may be disqualified from opening a HELOC if you do not meet the lender requirements. This may include low equity in your home, inadequate income or a low credit score.

To get approved for a HELOC, your credit score should fall in the mid-to-high 600s—though a score of 700 or higher is even better. Having good credit can also qualify you for a better interest rate.

Risk of Overborrowing

With some HELOCs, you only need to make interest payments during the draw period. But when the repayment period kicks in, you'll have to start repaying the loan principal. If you aren't careful with your borrowing, you may face unaffordable payments when it's time to repay.

Borrowers often wonder if they can pay off their home equity line of credit (HELOC) early. The short answer? A resounding yes, because doing so has many benefits. If you're making regular payments on your HELOC, you may be able to pay off your debt sooner, so you're paying less interest over the life of the loan.

If you took out a 10-year, $100,000 home equity loan at a rate of 8.75%, you could expect to pay just over $1,253 per month for the next decade. Most home equity loans come with fixed rates, so your rate and payment would remain steady for the entire term of your loan.

The current interest rate for 15-year home equity loans is slightly higher at 9.13%. If you borrow $75,000 with these terms, you'll pay $62,971.97 in interest over the course of the loan — but your monthly payment will be lower at $766.51.

The current average rate nationwide for a 10-year home equity loan is 9.07%. If you take out a loan for $200,000 with those terms, your monthly payment would come to $2,541.10.

Experts advise against using loan money to buy stocks—you can possibly lose the money and be stuck with a loan you can't afford to repay. You should also avoid using a HELOC to invest in luxuries like vacations, since the money will be gone quickly without an asset to sell if you end up needing the money down the road.

Do you need an appraisal for a HELOC? ›

Yes, typically an appraisal is required in order to obtain a HELOC, however it is often a less detailed appraisal than necessary for a primary mortgage. To assess the amount of loan a homeowner can be awarded, lenders will need an accurate account of the value and condition of the property.

In most cases, this happens because you don't meet your lender's minimum requirements for the loan. Often, HELOC denial is due to factors within your control, such as a low credit score, insufficient home equity or poor debt-to-income ratio.

However, the average time from application to approval for a HELOC is around 2 to 6 weeks. Underwriting is generally the part of the process that takes the longest, which can be anywhere from a week to 30 days or longer.

While there's no universal minimum HELOC income requirement, lenders will consider your personal cash flow along with other factors to evaluate your ability to repay any debt you incur on the credit line. Income and employment verification for HELOC applicants typically involves submitting pay stubs or tax returns.

Obtaining a HELOC without a job is possible as long as you have some form of income. A no-income verification HELOC isn't a specific loan product, but rather a term used by lenders who are willing to work with borrowers without traditional income documentation.

A HELOC can be used for any type of expense, including home renovations, buying a second home or investment property, paying for college tuition, and paying-off high interest debt, to name a few.

While having an unused HELOC can be advantageous in many ways, it's essential to be aware of the potential costs. Some HELOCs come with annual fees or maintenance fees, which you might still have to pay even if you don't use the credit line. The fees you could incur, even with an unused HELOC, include: Inactivity fees.

Like a traditional home equity loan, a HELOC can be used for anything you want. While funds can be used for anything, a HELOC is the perfect financial instrument for long-term, ongoing expenses or projects. Common uses include home renovations or repairs, medical bills, or college tuition.

A HELOC comes with a lower interest rate than credit cards and can simplify your monthly payments. You could lose your home if you can't repay the line of credit, so using a HELOC to pay off credit cards probably shouldn't be your first choice.