HELOCs: Are they worth it?
By: James Flippin · November 17, 2022 · Reading Time: 3 minutes
Making a Comeback
HELOCs, or home equity lines of credit, allow property owners to borrow funds against the value of their home. They’re different from what are referred to as “cash-out refinances,” in which a mortgage is refinanced and some portion of money is taken by the mortgagor at closing.
According to ATTOM Data Solutions, a firm that analyzes real estate data, Americans took out $66 billion in HELOCs during this year’s second quarter. That represented a 40% annual increase, the largest jump in nearly three years.
Some customers see a HELOC as a source of financial security, while others have a particular expense in mind. Taking out a HELOC is a personal decision, but financial advisors do caution against treating homes like cash machines.
How They Work
HELOCs operate similarly to credit cards, but with lower interest rates. Because your property backs up the loan, lenders are more comfortable with charging less to borrow. Bankrate.com lists the current average HELOC rate at 7.7%, while the average rate on a personal loan is 10.64%, and the average APR on a credit card is 19.04%.
These credit lines do not encompass the entire value of your home, rather only a percentage of your total equity in it. And, in order to qualify, your home value must be at least 15% higher than what you owe on a mortgage. There are additional costs associated with HELOCs, such as appraisal and title fees, which can add up to around 2% to 5% of the total credit line.
Pros and Cons
One of the most common ways borrowers use HELOCs is for home improvement projects. This has an added benefit, in that interest paid on a HELOC is tax deductible if you use the funds for renovations and improvements.
Typically, financial advisors caution against using HELOCs for significant, one-time expenses such as a vacation or a wedding. It’s also important to know that HELOC interest rates are variable, so as rates rise, you’ll pay more to carry the loan. Because of this, some advise against using a HELOC in order to make investments, such as stock purchases, as gains and expenses could cancel out.
HELOCs can be useful financial tools, and they’re growing in popularity, as mortgage refinance becomes less attractive. It is important, however, to be wary of the risks involved — especially when it’s your home on the line.
Looking for more stories like this? Check out On the Money — SoFi’s one-stop-shop for news, trends, and tips!
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.