Is a HELOC a Good Idea?

How to Determine if a HELOC Is Good for You 

Weighing the pros and cons can help you decide whether a HELOC makes sense. However, you also need to consider whether it is the right financial choice for your specific situation. Here are a few key factors to think about when deciding whether a HELOC makes sense. 

Do You Meet HELOC Eligibility Requirements?

Reviewing specific eligibility criteria can help you decide if you’re ready for a HELOC: 

• Home equity: Many lenders require at least 15% to 20% home equity remaining after the new loan closes. 
• Credit score: Is your credit score high enough to qualify?
• Debt-to-income (DTI) ratio: Does your DTI meet the lender’s threshold?
• Loan-to-value ratio (LTV): Is your LTV below the lender’s requirements?
• Budget: Have you considered whether you can afford the monthly payments?

If you answered yes to these, you may meet the requirements for a HELOC. Make sure you also consider how you want to use the HELOC before applying.

How Would You Use a HELOC?

If you’re considering a HELOC, review some common scenarios when it may be a good fit and when you might seek an alternative.

A HELOC could be a smart solution for:

• Consolidating debts: When you have multiple credit cards with high interest rates, a HELOC can help you pay those off. Ideally, you’ll get a lower rate with a HELOC and save money on interest over time.
• Renovations: When you want to remodel or upgrade your home, you can use a HELOC for home improvements. The interest you pay on the HELOC for these renovations might be tax-deductible. Consult a tax advisor regarding the deductibility of interest and charges.
• College tuition: If your child is heading off to college and needs help covering costs, you can consider a HELOC.

A HELOC may not work if you’re facing:

• Declining home value: If your home’s value drops, the lender may freeze or reduce your limit to make sure you stay within their guidelines.
• Rising rates: If rates are rising, redraws could be more expensive in the future.
• Changes in your financial situation: While it can rarely be predicted, losing your job or a drop in your credit score can lead the lender to pause your credit line or lower your limit.

Compare your options carefully and consider how they could support your long-term financial goals.

HELOC Alternatives

If a HELOC doesn’t fit your situation, consider these alternatives:

• Home equity loan: A home equity loan provides a lump sum up front and uses your home’s equity as collateral. There are no redraw options. You receive your lump sum payment only and cannot borrow again.
• Cash out refinance: You may save money with a new mortgage and receive a portion of your home equity as cash. By refinancing, the total finance charges may be higher over the life of the loan. HELOCs and cash-out refinances are very different, and which is better depends on many factors of your financial situation, so make sure you understand them both.
• Personal loans: If you’re qualified, you may be able to get a smaller personal loan. Personal loans often have higher interest rates than cash-out refinances and HELOCs, but your house is not on the line.

Every financing option has its own pros and cons, so consider speaking with a loan advisor or getting prequalified to better understand what you’re eligible for.

Considering a HELOC FAQs

If you’re considering a HELOC, here’s additional information that can help you make a more confident decision:

Can You Get a HELOC if You Still Have a Mortgage?

Yes, it’s possible to get a HELOC if you still have a mortgage as long as you meet your lender’s qualifications. In most cases, the HELOC is considered a second mortgage or second lien.

Does a HELOC Affect Your Credit Score?

A HELOC can affect your credit score. The lender will typically perform a “hard inquiry,” with your application, which will temporarily lower your score. But on the other hand, a HELOC can improve your score if you use it to pay off high-interest debts or to streamline your finances and make regular, on-time payments.

How Long Does It Take to Get Approved for a HELOC?

The time it takes to get a HELOC can vary from person to person and lender to lender. It depends on how quickly the lender receives the paperwork, whether an appraisal is needed, and how complex the underwriting process is. With Freedom Mortgage, you can get funded in as few as five days.*

Is a HELOC a Good Idea for Debt Consolidation?

Some people may find that a HELOC is a good way to consolidate high-interest debts for savings and simplicity. But keep in mind that it utilizes your home as collateral.

Final Thoughts: Should You Get a HELOC?

You’ll want to weigh all the benefits and risks before deciding to apply for a HELOC. However, for many, it’s a helpful way to consolidate debt, pay for home improvements, or tackle other large financial goals. If you think it’s right for you, you can apply for a HELOC today to confirm your eligibility and start mapping out your plans.

* Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing, or that require a waiting period prior to closing.