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Home equity lines of credit (HELOCs) let you access the equity you've built in your home with a flexible credit line. With interest rates expected to drop in 2024, variable-rate HELOCs might remain a popular option for homeowners who need to borrow money. But consider the pros, cons and alternatives before applying for a HELOC.
5 HELOC Trends in 2024
Although mortgage rates have decreased since their peak in late 2023, they're much higher than the sub-3% rates that were available several years ago. Using a HELOC for renovations and upgrades could be appealing, particularly because HELOCs tend to have variable rates and interest rates are expected to drop in 2024.
Of course there are no guarantees, but here's what we're seeing at the start of 2024:
- More people are using HELOCs. The total number of open HELOC accounts dropped as people refinanced into lower-rate mortgages. It's increased every quarter since mid-2023, but there are still 1.7 million fewer HELOCs today than at the start of the pandemic, according to the Federal Reserve.
- Total HELOC balances march upward. Overall, balances on HELOCs have steadily increased since 2021—with the average HELOC balance reaching $42,139 in Q3 2023, according to Experian data.
- Credit limits increase again. HELOCs' limits can increase as homeowners pay down their mortgages and their home values increase. According to Federal Reserve data, HELOC limits increased by $24 billion overall in Q4 of 2023—they've increased by 10% over the past two years.
- Fraudsters tap into HELOCs. The increasing popularity of HELOCs has also caught the attention of criminals who try to take over your account or write fraudulent HELOC checks. Fraud isn't unique to HELOCs however, and you can learn how to protect yourself from HELOC fraud.
- There are more introductory interest rate offers. Similar to last year, some lenders are advertising introductory annual percentage rate (APR) offers. These might not be as low as before, but a teaser rate that lasts six months could benefit the borrower if interest rates drop during that time.
A few major banks, such as Wells Fargo and Chase, still haven't returned to the HELOC market. But online lenders and financial technology firms stepped in to offer online-only HELOCs with simple applications and fast funding. Credit unions, a long-time staple in the HELOC world, could also still be a good option.
Pros and Cons of HELOCs in 2024
There are many reasons to consider a HELOC if you have equity in your home and need to borrow money, but they also have drawbacks and aren't a great fit for every situation.
Pros
- Rates may drop in 2024. Many HELOCs have variable interest rates that rise or fall with a corresponding benchmark rate. The prime rate is a commonly used benchmark and it's tied to the federal funds rate. Because the federal funds rate is expected to drop several times in the coming year, the interest rate on HELOCs could also go down.
- Intro offers could align with the rate drops. If you open a HELOC today, you might receive a temporarily lower rate on your draws for the first six to twelve months. The timing might align with the drop in benchmark rates.
- Lower interest rates than alternatives. HELOCs also tend to offer lower interest rates than credit cards. They may also have lower rates than unsecured personal loans.
- Potential tax benefits: Unlike most types of credit, the interest you pay on a HELOC might be tax deductible if you use the money to substantially improve—not simply repair or maintain—your home.
Cons
- There's no guarantee rates will drop. If interest rates stay flat or increase, your plans for a HELOC that gets cheaper over time won't work out. However, some lenders offer fixed-rate HELOCs or let you convert your variable-rate draw into a fixed-rate loan, which could mitigate this risk.
- Housing prices might decrease. If housing prices drop in your area, you might find yourself underwater—owing more on your mortgage and HELOC than your home's current value. This could put you in a bind if you want to sell your home and move.
- HELOCs use your home as collateral. You're putting your house on the line to take on more debt and another monthly payment.
Is a HELOC a Good Idea?
If you're considering different financing options, a HELOC might be a good idea if:
- You'll have a low loan-to-value (LTV) ratio. Rising housing prices mean you'll have more equity in your home and may qualify for a higher credit limit. Borrowing less than the maximum amount and having a low combined LTV could help you qualify for a lower interest rate.
- You think interest rates will drop. Taking on a variable-rate loan always comes with risk. But a HELOC could be a good option if you can get a low promotional rate and think interest rates will drop before your HELOC's standard variable APR kicks in.
- You're financing a home improvement project. A home equity loan or HELOC could be a good option for home improvement projects because the interest payments may be tax-deductible.
- You want a credit line for emergencies. If you can find a HELOC with low or no closing costs, maintenance and inactivity fees, you could keep the line open for unexpected expenses. However, you might not want to rely on a HELOC as your only emergency fund because lenders can lower your credit limit, freeze or close your HELOC without warning.
HELOCs also aren't necessarily the best fit for some expenses. For example, you might not want to use your home as collateral to borrow money for a vacation or purchase investments. And even though drawing from a HELOC to consolidate credit card debt might help you save money and pay off the debt, falling behind on payments could lead to foreclosure.
Alternatives to HELOCs
You might want to use other types of credit depending on how you plan to use the money and your overall financial situation. Here are four options to consider.
Home Equity Loans
A home equity loan is an installment loan that uses your home as collateral. Similar to HELOCs, the amount you can borrow depends on your equity in the home. Home equity loans also tend to have fixed interest rates that start lower than current HELOC rates. They could be a better option than a HELOC if you need the entire loan amount upfront. However, a HELOC might make more sense if you think rates will likely drop soon.
Cash-Out Refinancing
Cash-out refinancing is when you refinance your mortgage, borrow more than your outstanding balance and keep the difference as cash. It likely won't be a good fit if you already have a low-rate mortgage. However, if you recently bought a home, you might qualify for a lower rate if your credit improved. Or, you might be able to lower your monthly payment if refinancing will get rid of your mortgage insurance.
Personal Loans
A personal loan is an unsecured installment loan, meaning you qualify based on your creditworthiness and don't have to use your home as collateral. Personal loans tend to have fixed interest rates, which may be similar or lower than HELOC rates if you have good to excellent credit. There are no closing costs, but some lenders charge origination fees, which are often a percentage of the loan amount.
Credit Cards With Introductory Offers
For smaller expenses, a credit card with an intro 0% APR offer on purchases or balance transfers might be a good option. You can use the card for big expenses or transfer funds to your bank account and then pay down the balance while you aren't accruing interest. Some of the best credit card offers come with a 21-month intro 0% APR period. Or, you might opt for a card with a shorter promotional period on a card that also has a large intro offer.
Frequently Asked Questions
The Federal Reserve is expected to cut interest rates several times in 2024, which could lead to a change in HELOCs' benchmark rates and cause their interest rates to go down as well. However, there's no guarantee that rates will go down—it depends, in part, on whether inflation drops.
Many HELOCs have variable interest rates, but you can find HELOCs with fixed interest rates if you'd prefer. Some lenders also have options that allow you to convert a variable-rate draw into a fixed interest rate, and to convert fixed-rate balances back to variable rates.
To qualify for a HELOC you'll generally need to have at least 15% to 20% equity in your home based on your home's current value. Your credit score, income, debt-to-income ratio (DTI) and LTV can also affect your eligibility and the credit limit and interest rate you receive. Additionally, you may need an appraisal and proof that you have home insurance.
Monitor Your Credit and Financing Offers
Whether you're looking for a credit card, personal loan or home equity financing, your credit history and score can greatly impact your options and offers. Get your credit report and score for free from Experian with ongoing credit report and FICO® Score☉ tracking. Experian members can also see personal loan and credit card offers based on their unique credit profiles.