Is a HELOC a Good Idea? | Pros & Cons 2025

Is it a good time to get a HELOC?

Home values are rising, which means homeowners are sitting on thousands in untapped equity. That’s money they could use right now. A home equity line of credit (HELOC) lets you borrow against that value to get the cash you need.

A HELOC loan works like a credit card but with a higher credit limit and a longer repayment period. Plus, HELOC rates are typically much lower than those of other types of loans. But this isn’t free money. Some risks come with it.

So, is a HELOC a good idea? Let’s break down the pros and cons of HELOCs to help you make an informed decision.

In this article (Skip to...)

• HELOC pros and cons
• HELOC basics
• HELOC rates
• HELOC best practices
• Qualifying for HELOCs
• HELOC alternatives
• FAQ

HELOC pros and cons

Are HELOCs a good idea? Like any financing option, a home equity line of credit comes with pros and cons. Knowing when a HELOC loan makes sense — and what risks to watch for — can help you decide if one is right for you.

*Maximum loan amounts vary by lender and depend on borrower eligibility.

Pros of a HELOC

1. Low interest rates

HELOCs generally offer lower interest rates than home equity loans, personal loans, and credit cards. Getting a lower HELOC rate can save you thousands of dollars over the life of your loan.

2. Flexible financing

One of the biggest advantages of a HELOC is that you can use the funds for virtually any purpose. A HELOC can be useful for financing home improvements, medical costs, debt consolidation, or any other expense that aligns with your personal financial situation.

“HELOCs are arguably more flexible than a traditional cash-out refinance of your home loan. Once approved for a HELOC, you can access a line of credit as needed, as opposed to having cash from a refi sitting in a savings account,” notes David Friedman, CEO of investment property platform Knox Financial. “With a cash-out refi, you are committed to paying the new principal and interest balance for the duration of the home loan — likely 15 to 30 years.”

3. Borrow only what you need

Another HELOC benefit is flexibility. You borrow only what you need during the draw period, pay it down, and borrow again, just like a credit card. Other options, such as cash-out refinancing, personal loans, or a home equity loan, provide a one-time lump sum upfront.

“Your available credit is restored whenever you pay down your outstanding HELOC balance,” explains Dino DiNenna, broker/Realtor with Southern Lifestyle Properties in South Carolina. “You can borrow against your HELOC again and again if necessary, and you can borrow up to the credit limit you set at closing for the duration of your draw period.”

4. Interest may be tax deductible

If you use a HELOC loan to buy or improve your home, IRS guidelines say the interest may be tax-deductible.

“Any interest paid on a HELOC or home equity loan that is used to purchase, construct, or enhance the property that serves as security for the loan is tax-deductible,” says Sep Niakan, managing broker for CondoBlackBook.com.

Cons of a HELOC

1. Your home is collateral

The biggest drawback to a HELOC is that it requires you to use your home as collateral. That means you could lose your home to foreclosure if you cannot repay your HELOC per the agreed-upon terms.

2. Variable interest rates

Unlike home equity loans, which have fixed interest rates, HELOC rates fluctuate with the market. What starts low can increase fast. In 2025, HELOC interest rates averaged around 7.8%, compared to 6.7% for a cash-out refinance.

3. Risk of overspending

With a large credit limit and interest-only payments during the draw period, it’s easy to overspend. “It’s simple to access cash quickly without thinking about the consequences,” says Shad Elia, CEO of New England Home Buyers. He notes that when the loan starts to amortize at the end of the draw period, monthly payments can jump sharply.

“A borrower’s lack of discipline is frequently a drawback of HELOCs,” cautions Shad Elia, CEO and founder of New England Home Buyers in Massachusetts.

4. Prepayment penalties

Some HELOC loans charge a fee if you pay off the balance too soon. Before you borrow, ask your lender about its prepayment rules.

5. Closing costs

Some lenders charge closing costs on a HELOC, typically ranging from 2% to 5% of your credit limit. Others may waive them, so it’s worth asking.

HELOC basics

A home equity line of credit works like a credit card, but the value of your home backs it. You can borrow what you need, when you need it, and pay interest only on the amount used.

People use HELOCs for home remodeling, emergencies, and other major costs. They’re flexible and don’t require refinancing your current mortgage loan. Just remember that your home serves as collateral.

How do HELOCs work?

You can get a HELOC loan through a bank, credit union, or online lender. Most homeowners apply through the same place that holds their mortgage loan, but you’re free to shop around for the best HELOC rates.

Here’s how a HELOC works:

• Apply with a lender. You’ll submit details about your income, credit score, and the value of your home.
• The lender sets your credit limit. They’ll review your finances and calculate how much you can borrow using your loan-to-value and debt-to-income ratios.
• Withdraw funds as needed. Once approved, you can tap into your credit line during the draw period, often using checks, transfers, or a dedicated card.
• You only pay interest on what you use. Unlike a lump sum loan, you don’t start paying until you borrow. Most HELOC loans come with variable interest rates, often tied to the prime rate.
• Make monthly payments. You’ll make interest-only payments during the draw period. Once it ends, you enter the repayment period, where you’ll pay both principal and interest, usually over 10 to 20 years.
• Use your money as you see fit. Many use it for home improvements, high-interest debt consolidation, or even to cover student loans. You’re not limited to one use.

But be careful. Your home serves as collateral for a HELOC loan. Miss payments, and you risk foreclosure. If your home’s value drops, you might owe more than it’s worth.

Why are HELOCs so popular these days?

HELOCs are a good idea right now because homeowners want to tap into their equity without messing with their current mortgage loan. With interest rates still higher than they’ve been in recent years, a lot of people don’t want to refinance. A home equity line of credit gives you cash when you need it, and you only pay interest on what you use. It’s flexible, and you keep your existing mortgage rate.

The numbers back it up. HELOC originations have been climbing since 2021, according to Home Mortgage Disclosure Act data. A HELOC can make more sense than taking out a personal loan or doing a cash-out refinance, especially if HELOC rates drop later in 2025.

How much can I borrow with a HELOC?

The amount you can borrow with a HELOC depends on your home’s value, your current mortgage balance, and what your lender allows. Most lenders stick to a loan-to-value range of 80% to 90%.

You don’t need a fancy HELOC calculator to figure this out. To determine how much you can borrow with a HELOC, follow these steps:

1. Find out the current market value of your home.
2. Check the loan-to-value (LTV) percentage your lender offers, usually around 80%.
3. Multiply your home’s value by that percentage.
4. Subtract what you still owe on your mortgage loan.
5. The result will be the maximum amount you can borrow using a HELOC loan.

Example: If your home is worth $400,000 and your lender uses an 80% loan-to-value (LTV) ratio, that’s $320,000. Subtract a $200,000 mortgage, and you may qualify for a home equity line of credit up to $120,000.

Are HELOCs a good idea for everyone? Only if the money has a purpose and a plan to pay it back.do so. Always consider your ability to repay the loan and how it fits into your overall financial plan.

How does HELOC repayment work?

Repaying a HELOC works differently than repaying a traditional loan. It has two phases: the draw period and the repayment period.

1. Draw period: Usually lasts 10 years. You can borrow from your credit line anytime, up to your credit limit. During this time, you typically only make interest-only payments on what you borrow. If you don’t borrow, you don’t owe.
2. Repayment period: This phase usually runs for 10 to 20 years. You start repaying what you borrowed — plus interest. You can’t borrow more unless your lender approves a renewal.

Some HELOCs require full repayment as soon as the repayment period begins, mainly if you've used it for big expenses like auto loans or debt consolidation. Others let you convert to a fixed-rate second mortgage.

Current HELOC rates

As you might suspect, home equity line of credit rates vary widely by lender and product type. Just like mortgage rates, your HELOC interest rate depends on factors such as your credit score, debt, and the amount you plan to borrow.

Currently, most HELOC rates range from 8% to 10%. Many home equity lines of credit have variable interest rates tied to the prime rate, which as of early 2025 is hovering around 8.5%. That means your starting HELOC rate could be prime plus a margin, such as prime + 1%, which would put you at 9.5%.

Some credit unions or banks may offer introductory HELCO interest rates in the 6% to 7% range for the first six to 12 months. Still, these rates typically reset — sometimes sharply — after the promotional period ends. Fixed-rate HELOC options are also available, although they typically start at a slightly higher rate than variable-rate offers.

To make sure you’re not overpaying, compare quotes from multiple lenders. Look for the lowest HELOC rate, but also check fees and terms.

When is a HELOC a good idea?

A HELOC is a good idea for home renovations, especially when the work happens over time. You borrow in stages, only pay interest on what you use, and you might qualify for a tax deduction if the money goes toward home improvements.

It can also help in other situations: as a backup for emergency expenses, to cover college costs if you don’t qualify for federal student aid, or to consolidate high-interest debt. However, remember that your home serves as collateral. If you can't manage repayment, you could lose it.

Do I qualify for a HELOC?

Most HELOC lenders want to see three things:

1. At least 15–20% equity in your home
2. A credit score of 620 or higher
3. A debt-to-income ratio that shows you can handle another loan.

Beyond that, HELOC requirements may include steady income, an appraisal to confirm the value of your home, a title search, and proof of homeowners insurance. Some lenders might also ask for tax returns, pay stubs, or other financial documents to show you can handle the monthly payments.

Are there any alternatives to a HELOC?

Home equity lines of credit can be useful for the right type of borrower. But many homeowners question if getting a HELOC is a good idea and may want to consider alternative financing options.

• Home equity loan: A home equity loan helps you leverage the equity in your home. The loan amount is issued in a lump sum and repaid in monthly installments. Both the interest rate and monthly payments are fixed. But your home is used as collateral to secure the loan.
• Cash-out refinance: A cash-out refinance replaces your existing mortgage with a new, larger loan. You receive the cash difference between the new loan balance and your old mortgage balance as a lump sum. However, your entire mortgage is reset.
• Personal loan: This is an unsecured loan from a bank, credit union, or online lender that you pay back in fixed monthly payments. Because your home is not used as collateral for the loan, you will pay a higher interest rate.

FAQs about HELOC loans

Find out if you qualify for a HELOC

Many homeowners have built equity quickly due to rising home prices. If this is your situation, then you may easily qualify for a HELOC. 

Get a few quotes from different lenders. They’ll each review your personal finances and determine how much money you can borrow. Is a HELOC a good idea right now? Explore your options by starting with the link below.