A house is many Americans’ largest asset.
Your home can also be a source of cash, if you’ve built enough equity. And while this year has been dominated by headlines about refinancing as one method to tap into this equity, it’s not the only way.
The home equity line of credit (HELOC) has been tougher to come by over the past year, but can be another option worth looking at depending on your circumstances.
Here’s Where to Start
A HELOC can be a way to access cash with lower interest rates than credit cards or personal loans. With rates so low right now, it can be a good time to get a HELOC — if you can find one.
What Is A HELOC?
A HELOC is a revolving line of credit, much like a credit card. Credit cards are unsecured loans, but a HELOC is secured by your home. This means if you default on your loan payments, the lender can take your house.
“HELOC is like a credit card on your house in the sense that it’s a revolving line of credit and you can borrow and repay with a lot of flexibility, borrowing what you need when you need,”says Greg McBride, chief financial analyst at Bankrate.
Check for HELOCs at banks and credit unions that you already have accounts at, since some lenders have stated that they are only working with existing customers at the moment.
How a HELOC Works
HELOCs usually work on a 30-year model, with a 10-year draw period and 20-year repayment period. During the draw period you can spend as much as you want up to your line of credit limit. Then you’ll have the length of the repayment period to pay off what you spent.
HELOCs traditionally have variable-rate interest, meaning your interest rate fluctuates in relation to a benchmark prime rate. Fixed-rate HELOCs do exist, but they’re more commonly found when interest rates are on the rise.
“Some lenders offer borrowers the option of fixing the interest rate on their outstanding balance for example, so they are not exposed to rising interest rates after they’ve piled up a balance,” McBride says.
But this is not something to be concerned about at the moment because rates are low and unlikely to rise for a couple of years, McBride says.
Is Getting a HELOC a Good Idea?
A HELOC can be useful if you have any big expenses coming up that you need cash for. Some examples include home renovations, college tuition, or debt consolidation.
We reached out to five HELOC lenders, and those we talked with say accessing home equity depends on your unique financial situation, but that lower interest rates right now might be an incentive to consider this type of credit.
“People should always be mindful when accessing the home equity they have built in their home regardless of the market,” says Tom Parrish, head of retail lending product management at BMO Harris Bank. “They should think about prudent ways that they can utilize their home equity to help them make real financial progress.”
Consolidating high-interest rate debts to save on interest can help you save money in the long run, but a HELOC can be used for anything. It can make sense if you don’t know exactly how much your expenses are going to be, or if you have ongoing expenses, because you’ll only have to pay for what you actually spend (plus interest).
“People that are doing huge home improvement projects where they’re going to be incurring the costs in stages really look to the HELOC because they’re going to borrow the money only when they need it,” McBride says.
In this way, a HELOC is similar to a credit card, but they often have much lower interest than a credit card. HELOC rates are around 5% right now, while credit card APRs have an average of 16%.
But “don’t get it just for the case of getting it, or get it just because you can,” says Sidney Divine, a financial planner at Divine Wealth Strategies in Atlanta. “Over the long run it may not be right for you.”
For example, “using your property as collateral reduces the equity you have in your home,” says Michelle McLellan, senior vice president at Bank of America. This might be problematic if you decide to move sooner than anticipated — you’ll have to pay off the HELOC if you sell the property it’s tied to, and it could be more difficult to sell without as much equity.
Qualifying For a HELOC
It’s going to be tough to get a HELOC right now, especially if you have subpar credit, or not a ton of equity in your house. Many banks have stopped accepting HELOC applications altogether, while others are only working with pre-existing customers.
Because of this, the first place to look might be a bank or credit union that you already have an account with. There are other lenders still accepting applications, but also look at local banks and credit unions for location-specific offers.
HELOCs aren’t the only way homeowners can tap into their equity. Other possibilities include home equity loans, and cash-out refinancing. And personal loans could even be an option, depending on your circumstances.
Home equity loans
Not to be confused with a HELOC, a home equity loan is not a revolving line of credit, but a straightforward loan. You’ll receive a lump sum payment up front and then pay it off over the course of the loan term. There is one key similarity though: The home equity loan is also a secured loan that counts your home as collateral.
If you don’t have enough home equity or good enough credit for a HELOC right now, you’ll probably have similar issues attaining a home equity loan.
Cash-out mortgage refinancing
A cash-out mortgage refinance is when you sign up for a home loan for more than what you owe on a current mortgage, and then get cash for the difference.
“A lot of people are in the position where they can profitably refinance their mortgage, and so that becomes the avenue through which they can access their home equity,” McBride says.
A cash-out mortgage refi is still going to be more difficult to get right now compared to pre-pandemic, but not as difficult as a HELOC or a home equity loan. Refinance rates have been historically low for months, so a cash-out refinance could be a good option to consider.
“Being able to lower the rate, pull some cash and consolidate, that frees up additional disposable income when things become uncertain,” says Darrin Q. English, senior community development loan officer at Quontic Bank.
A personal loan will get you the cash you need upfront, and can have lower interest rates than credit cards, though personal loan rates vary drastically. You’ll be able to use funds from a personal loan any way you want— a main draw.
They also require good credit history for approval, and it may be more difficult to find lenders at the moment as the credit market tightens.
A home equity line of credit can be a good way to access funds with lower interest rates than other options like credit cards or personal loans. But it’s going to be more difficult to get one right now, especially if your credit isn’t great or you have less home equity.