HELOC pros and cons: What to know before borrowing

A home equity line of credit (HELOC) lets you turn part of your home’s value, minus what you still owe, into cash. It works much like a credit card: You can draw funds as needed up to your limit. Your home serves as collateral in this case, so interest rates are typically lower than those on personal loans and credit cards. Still, it’s important to weigh the trade-offs.

Understanding the HELOC pros and cons can help you decide whether this type of financing aligns with your financial goals. 

Understanding HELOCs

A HELOC works differently from a standard loan. Understanding the key steps can help you plan responsibly and make the most of your line of credit:

— Application: You submit a request to the lender, who checks your credit, verifies your income, and appraises your home’s value. Some lenders now offer appraisal-free HELOCs, speeding up the process for homeowners. To qualify, you usually need a minimum credit score of 620 and a debt-to-income ratio of 43% or less.

— Approval: If approved, you can typically borrow up to 85% of your home’s value, minus your outstanding mortgage balance. Better makes this process simpler with its One-Day HELOC, offering competitive rates, fast approval, and a fully digital experience.

— Draw period: During the initial five to 10 years of your HELOC, you can borrow, repay, and borrow again. Many HELOCs require interest-only payments during this time, though you can also pay down principal. Notably, you’ll only accrue interest on the funds you actually withdraw, unlike a traditional loan, where you pay interest on the full amount from day one.

— Repayment period: After the draw period ends, you stop borrowing and begin paying back both principal and interest over the remaining term, often 10–20 years. Monthly payments typically increase compared to the interest-only period, so it’s important to plan your budget.

— Account closure: Once you repay the balance, the line of credit closes. You can reapply if you need to access your equity again, though the lender may require a waiting period before reopening.

...in as little as 3 minutes – no credit impact

Home equity line of credit pros and cons

The table below breaks down the key benefits and drawbacks of a HELOC, helping you decide if it fits your financial goals.

5 advantages of a HELOC

HELOCs offer several ways to make managing expenses easier. The following five benefits show why this type of financing is appealing to many homeowners.

1. Lower interest rates

HELOCs often come with lower interest rates because your home serves as collateral, giving lenders more security than with credit cards and personal loans. They let you pay interest only on the funds you actually use and borrow and repay repeatedly as your needs change.

2. Flexible access

A HELOC provides access to funds whenever you want, instead of giving you a lump sum at once. This revolving structure helps you manage cash flow for expenses such as ongoing projects and monthly bills.

Some lenders, like Better, even offer HELOCs without an appraisal. This lets homeowners tap into their equity faster and with fewer steps.

3. Potential tax deduction

HELOC interest may be tax-deductible when you use the funds for qualified home improvements, such as updating your kitchen and replacing windows. This potential benefit can lower your overall borrowing costs when you use the credit responsibly, though individual tax situations may vary. 

4. Equity retention

Choosing a HELOC means you can tap your home’s equity while keeping your current loan in place. If you already have a low mortgage rate, refinancing just to access cash might not be the best option. Doing so could increase your interest costs and result in higher payments over time. 

5. Investment opportunities

You can use a HELOC to pay for home improvements, like a roof replacement and patio remodel, helping increase property value. It also allows access to funds for purposes such as buying a second home and making strategic investments.

5 cons of a HELOC

Understanding these five disadvantages of a home equity line of credit helps you make informed decisions before borrowing against your property.

1. Variable interest rates

One of the biggest disadvantages of a HELOC is that most have variable interest rates. That means your payments can fluctuate as market conditions change, making it harder to predict monthly costs and plan your budget.

2. Foreclosure risk

With your home as collateral, failure to make payments can lead to foreclosure. Because of this risk, it’s essential to borrow only what you can afford to repay. Unlike credit cards and personal loans, a HELOC is riskier since your property is on the line.

3. Fixed fees

Another downside of HELOCs is the set fees, such as application, appraisal, and closing costs, though exact charges vary by lender. These expenses may seem small, but they add up, increasing the effective cost of your credit line. 

4. Reduced home equity

When you borrow from your home’s value, you reduce the equity you’ve built up. If the housing market declines, you could end up owing more than your property is worth. This can limit future financing options and make it harder to sell. 

5. Overspending risk

The flexibility of a HELOC can be a double-edged sword. Managing the line of credit responsibly requires discipline, and easy access to funds can have the opposite effect, encouraging spending on nonessentials. So, be mindful of your borrowing while your credit line is open to prevent debt from spiraling.

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Is a home equity line of credit a good or bad choice?

Whether or not a HELOC is a good idea depends on your financial habits and long-term plans. It’s often a smart option if you have a steady income and clear goals for the funds, such as renovating your home and consolidating high-interest debt. A HELOC may not be ideal if you’re uncertain about future income and if variable rates could strain your budget.

Before deciding, compare other options, such as cash-out refinancing and a personal loan, to see if replacing your mortgage balance with a larger loan better suits your needs. You can also use a HELOC calculator to estimate payments and determine a borrowing amount that fits your budget.

Ways to borrow without a HELOC

If you’re unsure about a HELOC, consider these alternatives to help you access funds without putting your home at risk:

— Home equity loan: This option offers a lump sum with a fixed rate and predictable monthly payments. This option can be ideal if you know exactly how much you need and prefer consistency.

— Cash-out refinance: A cash-out refinance lets you replace your existing mortgage with a larger loan and take the difference in cash. Those who want a lower interest rate and consolidated debt may find this option useful, but it can extend the loan term and increase monthly payments.

— Personal loan: Borrowers can access an unsecured loan with higher interest rates but no home collateral. This can be a faster option with fewer requirements, though rates are typically higher than HELOCs and home equity loans.

— Low-interest credit card: A low-interest credit card is useful for smaller projects and short-term needs. Many cards offer introductory low or 0% interest periods. Keep in mind that accounts remain open unless closed, and doing so can affect your credit score. It’s also important to pay off what you owe before the promotional rate ends to avoid high interest charges.

Finding the best path for your home’s equity with Better

A HELOC can be a helpful tool when you understand both the advantages and the risks. With lower interest rates, flexible access to funds, and potential tax benefits, it’s appealing to many homeowners. 

Better streamlines the financing process with fast approvals, transparent terms, and digital convenience. Whether you’re ready to apply or exploring alternatives, Better offers tools and guidance to help you make the right financial move for your home and long-term goals. 

...in as little as 3 minutes – no credit impact

FAQ

What are the benefits of a HELOC?

A HELOC offers flexible access to your home’s equity, letting you borrow and repay repeatedly as your needs change. It often comes with lower interest rates than credit cards and personal loans, and it gives you the ability to tap into funds without refinancing your existing mortgage. Some homeowners also use a HELOC for strategic investments, such as home renovations and buying additional property.

What are the negatives of a HELOC?

A HELOC carries risks and costs that homeowners should consider. Most have variable interest rates, which can cause monthly payments to fluctuate. Your home also serves as collateral, so failing to make payments could lead to foreclosure. Other potential drawbacks include closing fees, reduced home equity, and the temptation to overspend, which requires careful budgeting and financial discipline. Is using a HELOC to pay off credit card debt a smart move?

Is using a HELOC to pay off credit card debt a smart move?

Some borrowers choose a HELOC to pay off high-interest credit card debt by replacing it with a lower-rate line of credit and committing to a clear repayment plan. Keep in mind that if you use a HELOC to pay off credit cards and other unsecured debt, missing payments could put your home at risk. Careful budgeting is essential.

When is getting a HELOC a bad idea?

A HELOC may not make sense if your income is uncertain, you plan to move soon, or you struggle with overspending. Variable market conditions can also lead to unexpected payments, making fiscal planning more difficult.