Over the past few years, home prices have surged nationwide. 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.
These kinds of problems are still common in many American markets, and home values and prices are still high. 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. However, what occurs if you withdraw a HELOC without using it?
A home equity line of credit (HELOC) can be a valuable financial tool but is it always the right choice? This article explores the pros and cons of getting a HELOC just in case helping you decide if it’s the right move for your situation.
What is a HELOC?
A HELOC is a revolving line of credit that allows you to borrow against the equity you have built up in your home. This equity is the difference between what you owe on your mortgage and the current market value of your home.
HELOCs offer several advantages. including:
- Flexibility: You can access the funds as needed and only pay interest on the amount you borrow.
- Lower interest rates: HELOCs typically have lower interest rates than credit cards or personal loans.
- Higher borrowing limits: You may be able to borrow more with a HELOC than with other types of loans, depending on your home’s equity.
Should you get a HELOC just in case?
There are several factors to consider when deciding whether to get a HELOC just in case:
Benefits:
- Peace of mind: Having a HELOC can provide peace of mind knowing you have access to funds in an emergency.
- Lower cost of borrowing: If you need to borrow money, a HELOC may be a more affordable option than a credit card or personal loan.
- Flexibility: You can use the funds for any purpose, including unexpected expenses, home repairs, or debt consolidation.
Drawbacks:
- Fees: HELOCs typically have origination fees, annual fees, and closing costs.
- Risk of foreclosure: If you default on your HELOC, you could lose your home.
- Temptation to overspend: It’s easy to overspend with a HELOC, which can lead to debt problems.
More about getting a HELOC just in case:
Here are some additional things to consider before getting a HELOC just in case:
- How much equity do you have in your home? Lenders typically require you to have at least 15-20% equity in your home to qualify for a HELOC.
- What are your financial goals? If you have specific financial goals, such as home renovations or debt consolidation, a HELOC may be a good option. However, if you don’t have any specific needs for the funds, it may be better to avoid the temptation to overspend.
- What are your other borrowing options? Consider other options, such as a personal loan or credit card, before deciding on a HELOC.
How long do I need to be in my home to qualify for a HELOC?
There is no specific waiting period to qualify for a HELOC However, lenders typically prefer borrowers who have been in their homes for at least six months to a year.
How to get a HELOC:
If you decide to get a HELOC, here are the steps involved:
- Calculate your home equity. Subtract your mortgage balance from the current market value of your home.
- Shop around for lenders. Compare interest rates, fees, and terms from different lenders.
- Apply for a HELOC. Provide the lender with your financial information and documentation.
- Get approved. Once approved, you can access your HELOC funds as needed.
Getting a HELOC just in case can be a good option for some homeowners, but it’s important to weigh the pros and cons carefully before making a decision. Consider your financial situation, borrowing needs, and risk tolerance before applying for a HELOC.
Additional Resources:
- LendEDU: Should I Get a HELOC Just in Case?
- Navy Federal Credit Union: When You Should (or Shouldn’t) Get a HELOC
- Consumer Financial Protection Bureau: Home Equity Lines of Credit
Disclaimer:
This information is for educational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any financial decisions.
What happens if you take out a HELOC but don’t use it?
As a HELOC is a line of credit and not a one-time loan, you are not legally obligated to use it. And, heres what you can expect if you dont:
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.
HELOC Explained (and when NOT to use it!)
FAQ
Is it a good idea to have a HELOC just in case?
Is it bad to have a HELOC and not use it?
When should you avoid a HELOC?
Is it smart to get a HELOC right now?