Home prices have skyrocketed across the nation over the past few years. The trend began at the height of the pandemic, when low inventory, low interest rates, and high demand came together in a perfect storm. Additionally, the inventory problems worsened as mortgage rates started to rise in 2022 and fewer homes were listed for sale, which increased home values even more.
Those types of issues are still prevalent in many markets nationwide, and home prices and values remain elevated. Conversely, the average amount of tappable home equity currently stands at approximately $200,000, providing present homeowners with an invaluable financial instrument from which they can borrow money at a cheap interest rate for a variety of uses.
A home equity line of credit is one of your several options for accessing your equity (HELOC) Unlike home equity loans, a home equity line of credit (HELOC) is a revolving credit line that you can borrow against the equity in your property, but you aren’t technically required to use it. But what happens if you take out a HELOC but dont actually use it?.
Taking out a HELOC but not using it can be a smart financial move, but it’s important to understand the potential implications before doing so.
Benefits of Having an Unused HELOC:
- Financial Safety Net: An unused HELOC provides a readily available source of funds for unexpected expenses, such as home repairs, medical bills, or other emergencies.
- Flexibility: You can access the funds as needed during the draw period, without having to reapply for a new loan.
- No Interest or Payments Until Used: You won’t accrue interest or make monthly payments until you actually tap into the credit line.
- Lower Interest Rates: HELOCs typically offer lower interest rates compared to other forms of borrowing, such as personal loans or credit cards.
Potential Costs of an Unused HELOC:
- Annual Fees or Maintenance Fees: Some lenders may charge annual or maintenance fees, even if you don’t use the credit line.
- Inactivity Fees: If you fail to make minimum withdrawals as specified in your HELOC contract, you may incur inactivity fees.
- Cancellation Fees: If you decide to close your HELOC early, you might encounter cancellation fees.
- Application Fees and Closing Costs: These costs are incurred when setting up a HELOC, regardless of whether you use it or not.
Key Considerations:
- Interest Rate Fluctuations: HELOCs typically have variable interest rates, which means the interest you pay can change over time.
- Home Equity as Collateral: Your home equity is used as collateral for the HELOC. If you default on the loan, the lender could foreclose on your property.
- Responsible Management: It’s crucial to manage your HELOC responsibly to avoid incurring unnecessary costs or putting your home at risk.
Having an unused HELOC can be a valuable financial tool, offering flexibility and a safety net for emergencies. However, it’s essential to be aware of the potential costs and manage the credit line responsibly to avoid any negative consequences.
Additional Resources:
- FindLaw: Can You Walk Away from a Home Equity Line of Credit?
- CBS News: What Happens If You Take Out a HELOC But Don’t Use It?
Disclaimer: I am an AI chatbot and cannot provide financial advice. The information provided above is for general knowledge and informational purposes only, and does not constitute professional financial advice. It is essential to consult with a qualified financial advisor for specific advice tailored to your individual circumstances.
No interest will accrue
Being able to avoid paying interest on a home equity line of credit (HELOC) until you actually withdraw funds from it is one of its main advantages. This implies that you can use a home equity line of credit (HELOC) as a safety net for your finances, ready for unforeseen costs or emergencies, and you won’t pay interest until you actually need the money.
However, since HELOCs usually have variable interest rates, the amount of interest you pay may change depending on the state of the market. Therefore, even though interest won’t start to accrue until you use the credit line, be ready for possible rate increases when you do begin making withdrawals from it.
You’ll have continual access to a line of credit
Your safety net for unforeseen costs, like house repairs, medical bills, or other financial emergencies, can be an unused HELOC. Additionally, you won’t need to reapply for a new loan because this is a revolving credit line that you can use whenever you want during your draw period—up to your credit limit.
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FAQ
Can you get out of a home equity line of credit?
Can a home equity line be discharged?
What happens if you default on a home equity line of credit?
How do I cancel my home equity line of credit?
Can you borrow from a home equity line of credit?
You can draw from a home equity line of credit and repay all or some of it monthly, somewhat like a credit card. Unlike a credit card, however, HELOCs are not intended for minor expenses. When you’re shopping around for a loan, borrowing from the equity in your home will often get you the best rate.
Can I borrow against 85% of my home equity?
Assuming you qualify, you can borrow against up to 85% of your home equity. Hours after closing, you can access your credit line and use the money however you see fit. Your lender typically provides you with a HELOC credit card, checks, as well as an online account for digital transfers.
Should you get a home equity line of credit after retirement?
“If the market falls 20 percent in the six months after retirement, you’ll be glad you have a home equity line of credit in place,” McBride notes. “You can lean on that for a little bit, rather than pull money out of your 401 (k), and give your portfolio more time to recover.”
How long can you withdraw cash from a home equity line of credit?
You typically have 10 years to withdraw cash from a home equity line of credit, while paying back only interest, and then 20 more years to pay back your principal plus interest at a variable rate. In order to qualify, lenders usually want you to have a credit score over 620, a debt-to-income ratio below 40% and equity of at least 15%.