Using Home Equity Lines of Credit During Market Downturns

When stock markets tumble, the usual advice is to stay the course and avoid selling at a loss. But what happens when you actually need cash during a downturn?

A home equity line of credit can serve as a financial bridge, giving you access to funds without forcing you to liquidate investments at their lowest point.

This guide covers when to open a HELOC for bear market protection, what risks to watch for, and how to use this strategy without putting your home in jeopardy.

In this article (Skip to...)

• Why use a HELOC during a bear market
• When to open a HELOC for bear market protection
• How to qualify for a HELOC in volatile markets
• What happens to your HELOC if home values drop
• How a HELOC compares to other bear market liquidity options
• Risks of tapping home equity during market volatility
• How much to borrow from a HELOC in a bear market
• Find out if a HELOC fits your bear market strategy
• FAQs about using a HELOC in a bear market

Why use a HELOC during a bear market

A bear market happens when stock prices fall 20% or more from recent highs. If you need cash during one of these downturns, you face an uncomfortable choice: sell your investments at depressed prices, or find another source of funds.

Selling when markets are down locks in your losses permanently. Your portfolio never gets the chance to recover. A HELOC offers a different path. You borrow against your home equity instead, giving your investments time to bounce back.

• Avoid locking in losses: When you sell stocks during a downturn, those losses become real and permanent
• Keep your investments working: Markets have historically recovered from every bear market, but only for investors who stayed in
• Pay less interest: HELOC rates typically run 10 or more percentage points lower than credit card rates
• Borrow only what you use: You pay interest on the amount you draw, not your full credit limit

When to open a HELOC for bear market protection

Before a downturn begins

The smartest time to open a HELOC is when you don’t need one yet. Lenders look at your current home value and financial picture when deciding whether to approve you. Both can look very different once a recession hits.

Think of an unused HELOC as a financial safety net. It costs nothing to have sitting there, but it gives you options when things get rocky.

During active market declines

You can still apply for a HELOC during market turbulence, though expect a tougher process. Some lenders pull back during uncertain times. They might reduce credit limits, slow down approvals, or stop taking new HELOC applications altogether.

If you’re applying during a downturn, plan for extra documentation requests and a longer timeline.

While still employed with stable income

Banks want proof you can make interest payments. That means verifiable income matters a lot in the approval process. If retirement or a job change is on your horizon, getting a HELOC while you still have W-2 income makes qualification much easier.

How to qualify for a HELOC in volatile markets

Credit score and debt-to-income requirements

Most lenders want to see a credit score of at least 620, though scores above 700 unlock better rates. Your debt-to-income ratio, or DTI, also plays a big role. DTI measures what percentage of your monthly income goes toward debt payments. Lenders typically want this number below 43% to 50%.

Home equity and CLTV limits

Lenders use something called combined loan-to-value ratio, or CLTV, to figure out how much you can borrow. CLTV takes your existing mortgage balance, adds your potential HELOC amount, and divides by your home’s current value.

Most lenders cap CLTV at 80% to 90%. So if your home is worth $400,000 and you owe $300,000 on your mortgage, you’d have $100,000 in equity. With an 80% CLTV cap, you could potentially access up to $20,000 through a HELOC.

Income documentation for retirees and self-employed borrowers

Retirees can often qualify using pension payments, Social Security, or investment income. Self-employed borrowers typically provide two years of tax returns. Either situation can stretch the approval timeline beyond the standard 15 to 45 days.

What happens to your HELOC if home values drop

This question comes up a lot, and for good reason. If your home’s value falls significantly, your lender has options built into your HELOC agreement.

• Credit line freeze: Your lender can stop you from making new draws
• Reduced limit: Your available credit might shrink based on a new, lower appraisal
• Existing balance stays the same: You still owe whatever you’ve already borrowed

Here’s what won’t happen: your lender won’t demand full repayment immediately. But you might lose access to funds you were counting on. That’s why borrowing conservatively makes sense.

How a HELOC compares to other bear market liquidity options

When you need cash during a downturn, you have several choices. Each one comes with trade-offs worth thinking through.

HELOC vs selling investments at a loss

Selling stocks during a bear market turns paper losses into real ones. A HELOC lets you wait for recovery instead. One small upside if you do sell: tax-loss harvesting lets you use investment losses to offset gains elsewhere.

HELOC vs home equity loan

A HELOC works like a credit card secured by your home. You draw what you need, when you need it, and pay variable interest only on what you’ve borrowed. A home equity loan gives you a fixed-rate lump sum with set monthly payments. For expenses that are hard to predict, the HELOC’s flexibility usually makes more sense.

HELOC vs 401(k) loan or early withdrawal

Pulling money from a 401(k) before age 59½ typically triggers a 10% penalty plus income taxes. Even 401(k) loans, which skip the penalty, come due quickly if you leave your job. For most people, a HELOC costs less overall.

HELOC vs cash reserves or emergency fund

Cash is the safest option. No interest, no risk. But draining your entire emergency fund leaves you exposed. A HELOC can serve as a backup, helping you preserve cash for true emergencies.

Risks of tapping home equity during market volatility

Variable interest rates in a rising rate environment

Most HELOCs carry variable rates tied to the prime rate. When the Federal Reserve raises rates to fight inflation, your monthly interest payments go up too. Some lenders offer fixed-rate conversion options that let you lock in a portion of your balance.

Lender freezes and credit line reductions

As mentioned earlier, lenders can restrict your access during housing downturns. Don’t assume your full credit line will always be available. Plan for the possibility that it won’t be.

Putting your home up as collateral

This is the biggest risk. A HELOC is secured debt. If you can’t make payments, foreclosure becomes possible. Anyone considering this approach needs to weigh that consequence carefully.

How much to borrow from a HELOC in a bear market

Having access to credit doesn’t mean using all of it. Discipline matters here.

• Focus on essentials: Housing, food, healthcare, and insurance come first
• Skip discretionary spending: A HELOC isn’t free money; it’s debt secured by your home
• Keep a buffer: Don’t max out your credit line, since unexpected costs can still pop up

A reasonable guideline: calculate three to six months of essential living expenses and treat that as your maximum draw during a market downturn.

Find out if a HELOC fits your bear market strategy

A HELOC can be a smart tool for getting through market downturns, but it’s not the right choice for everyone. The approach works best for homeowners with meaningful equity, stable income, and the discipline to borrow only what they truly need.

Before moving forward, take stock of your situation. How much equity do you have? How stable is your income? How comfortable are you using your home as collateral?

FAQs about using a HELOC in a bear market