By Kathleen Willcox

Aug 15, 2022

(Getty Images)

With today’s rising inflation and interest rate hikes, potential borrowers are looking for new, less costly ways to access credit.

Until recently, a home equity line of credit, or HELOC, was hard to come by. But as mortgage rates increase and applications drop, more banks are willing to offer HELOCs to homeowners eager to tap into their home’s equity.

Yet a HELOC, like any other loan, isn’t right for everyone. So if you’re interested in exploring getting a HELOC—but aren’t quite sure what it is—read on.

We explain why a HELOC is suddenly easier to get and who can benefit from taking out this type of loan.

What is a HELOC?

In a nutshell, you’re borrowing against the value of your home with a HELOC.

A HELOC isn’t a lump sum of cash like many loans. Instead, it’s a revolving source of funds—much like a credit card—that you can access as needed. Banks offer different avenues for tapping into the funds, including using a credit card linked to the account, writing a check, or using an online transfer.

And as you repay your balance, the available credit increases (much like when you pay off a credit card). In most cases, once you’re approved for a HELOC, you can access the money for 10 years. And you have 10, 20, or 30 years to repay the loan at the end of that time.

Typically, homeowners use a HELOC to fund considerable home improvements, to pay for college, or to consolidate higher-interest debt. (Note: You can deduct only the interest on a HELOC if you use the funds for home improvements.)

Why it’s easier to get a HELOC now

HELOCs are a good bet for lenders, so expect to see more available now that fewer people are taking out mortgages due to rising interest rates.

“The market demand for HELOCs will continue to rise as a result of the Fed raising rates numerous times throughout this year,” says Ben Fisher, a luxury real estate specialist at the Fisher Group in Long Beach, CA. “For banks and credit unions, the anticipated rise in interest rates translates into stable margins. So equity credit—like HELOCs—is one of the safer products a bank or credit union can provide to its consumers.”

Why getting a HELOC can still be a challenge

While lenders are more willing to offer HELOCs, approval isn’t automatic. For example, lenders typically require you to have between 15% and 20% equity in your house to qualify for a home equity loan or HELOC.

Fisher explains that a homeowner with a $200,000 home would need between $30,000 and $40,000 worth of equity to land a HELOC.

“HELOCs are still more challenging to obtain than a personal loan, line of credit, or traditional credit card, typically because you’re dealing with larger sums of money,” says John Li, co-founder of New York’s Fig Loans.

Is a HELOC right for you?

A HELOC is an excellent option for homeowners who want access to cash for things like home repairs without selling their home or refinancing.

“With rising interest rates, we have seen HELOC volumes grow by 27% year over year,” says Doug Greene, owner of Signature Properties in Philadelphia.

Homeowners favor the HELOC because it allows them equal access to capital at rates lower than conventional refinancing rates.

If you need to obtain a small to medium-sized loan, a HELOC is likely to secure one of the best interest rates you can get, averaging between 5.5% and 7.25% for 10- and 20-year HELOCs, respectively, says Li. “Credit cards, on the other hand, sit at 17.25%, and the average personal loan interest rate is 10.6%.”

Who should avoid getting a HELOC?

Because the rates for a HELOC are variable, it isn’t a good option for those on a tight budget or a limited time frame.

“You need to easily afford HELOC payments, even if your rate rises by a few percentage points,” Li points out. “Otherwise, you could default on your loan and lose your home.”

The approval process often requires a home appraisal, which generally costs from $500 to $700. And landing the loan can take as long as two months to close from the start of your application. So if you need cash quickly, a HELOC may not be your best option.

And if you just purchased your home, you should avoid a HELOC. Otherwise, you risk owing more in a HELOC and a mortgage than your house is worth.

Bottom line: If you have owned your home for a few years, have a solid plan for using the funds, and have a flexible budget, then it may be the best way to borrow money right now.