What are the disadvantages of a HELOC?

With a home equity line of credit (HELOC), you can tap into your home's value to reach your next goal, whether that's giving your house a refresh, taking a much-needed vacation or funding your children's education. Thanks to the flexibility and often competitive interest rates, millions of U.S. homeowners use HELOCs every year.

Before you decide whether a HELOC is right for you and your goals, it's important to understand both the benefits and drawbacks of tapping into your home's equity. Here's what you need to know about HELOCs so you can make a confident borrowing decision.

HELOC disadvantages — and why they aren't always dealbreakers

All types of loans have their advantages and disadvantages, and a HELOC is no different. Some of the potential challenges that may come with a home equity line of credit include:

• Variable interest rates: A variable interest rate can be both a risk and a benefit. If rates go up, your HELOC rate will increase, and so will your payment amount. On the flip side, when rates fall, your HELOC's rate will too, so you'll owe less each month.
• Payment changes after the draw period: Once you stop drawing from the HELOC and begin repayment, your monthly payment may increase. However, you'll know what the timeline is when you open the HELOC, which gives you plenty of time to plan and budget for those monthly payments.
• Your home is used as collateral: Just like your first mortgage, when you borrow with a HELOC, you're borrowing against your house, so missed payments can put your home at risk. But since your house secures the loan, you're often able to get a lower interest rate compared to unsecured loans.
• Fees and closing costs: You may have to pay closing costs and other fees when you take out a HELOC, and the total can vary by lender and should be disclosed in advance. Some lenders, including Citizens, may offer HELOC options with no closing costs or fees, which can help reduce upfront expenses.
• Credit line reductions or freezes: Depending on the market and your home's value, a lender may reduce or freeze your HELOC credit line. Fortunately, even with a reduction, revolving access to financing allows you to borrow what you need and when you need it during the draw period.
• Reduced home equity: With a HELOC, you're borrowing against your home's equity, so your equity will drop. However, if you use it intentionally, it can help you achieve your overall financial goals. And the equity gets restored as you pay off the loan.

More HELOC positives

For many homeowners, the benefits of a HELOC outweigh the risks. Compared to other loan options, some of the advantages of a home equity line of credit include:

• Use for multi-stage projects: With a HELOC, you can borrow up to the limit during the draw period. If you're planning a major renovation to be completed in stages, you can borrow as you go and repay the HELOC as needed.
• Interest efficiency for partial use: You only pay interest on the amount you borrow from your HELOC, rather than on the entire credit line.
• Funds available for the entire draw period: The draw period for a HELOC can vary, but typically lasts about 10 years. You'll have access to financing throughout that entire period, without having to reapply for a loan.

Make the most of your HELOC benefits

HELOCs remain a popular option with many homeowners due to their flexibility and favorable interest rates. Understanding how a HELOC can benefit you, along with its potential risks, helps you make the best decision to reach your next goal.

Explore HELOCs with Citizens and get your rate today.

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