5 Home equity line of credit (HELOC) myths debunked

Thinking about using some of the equity in your home for renovations, debt consolidation or other expenses? A home equity line of credit (HELOC) might be one option for you.

A number of myths surround HELOCs as a financial tool, so we’re here to clear the air. Many of these myths prevent people from exploring all the benefits that HELOCs have to offer. With a HELOC, you have access to a line of credit with a lower interest rate than most lending options like credit cards or personal loans because it’s secured by the equity in your home.

If you’re looking for the truth about HELOCs, here’s a guide to separate fact from fiction.

Myth 1: Getting a HELOC changes your current mortgage rate

Reality: A HELOC will not change your current mortgage interest rate. A HELOC is a lending option separate from your mortgage. Your HELOC interest rate is based on your credit history, the value of your home and the line amount.

A cash-out mortgage refinance, for example, would require you to replace your existing mortgage with a new, larger mortgage. A HELOC is a separate borrowing option that allows you to tap into the available equity without impacting the mortgage rate you have grown accustomed to. The rate on your HELOC is a variable rate that tends to be higher than a first mortgage but lower than that of a personal loan or credit card. So, if you have a great mortgage rate locked in and you’re looking to take advantage of the home equity you have gained, a HELOC is a great option.

Myth 2: You can only use a HELOC for renovations or debt consolidation

Reality: While home improvement and debt consolidation are great ways to use a HELOC, and are the leading reasons people choose them, you're not restricted on how to use the money. You can use a HELOC for education, travel, weddings, vehicles, medical bills, adoption expenses, as an emergency fund or to pay for other important expenses.

Myth 3: HELOCs and home equity loans are the same

Reality: While there are some similarities, a HELOC is not the same thing as a home equity loan. Both a HELOC and a home equity loan allow you to borrow money against the equity in your home. Both allow you to borrow up to 80-85% of this equity.

When comparing a HELOC to a home equity loan, consider this: With a home equity loan, the borrower receives the loan proceeds all at once, while a HELOC allows the borrower to tap into the line of credit as needed, like a credit card. A benefit of being able to draw funds as you need them means you are not stuck paying interest on money you have yet to spend, with a HELOC you only pay interest on the money you use.

With a HELOC, you’ll pay a variable interest rate, which is usually lower than that of a credit card, personal loan, second mortgage or home equity loan, but higher than your mortgage. With a home equity loan, your interest rate is fixed, but usually higher than that of your mortgage.

Myth 4: You must use and pay interest on your entire credit line immediately

Reality: You can borrow as much or as little as you need during the HELOC draw period, which could usually last 10 years. During that time, you are only required to pay back the interest, but you can also make payments toward the borrowed amount. This is a good idea if you are able, as it can help reduce your payments later. Then when the draw period is over, you enter the repayment period. During this time, which could usually last 15 years, you’ll pay back both the amount you borrowed and interest.

Myth 5: It takes a lot of time and paperwork to get a HELOC

Reality: When you apply for a HELOC through Citizens FastLine®¹, you can apply in just a few minutes from your desktop or smartphone.²

With Citizens FastLine®, we’ve completely reimagined the home equity borrowing experience. A customer can apply online and get pre-qualified for an offer in just minutes. The entire process, from application to closing, can be completed in as little as seven days with very little paperwork. Allowing customers to have cash in hand and as little as two weeks.

Should you get a HELOC?

In short, if you’re considering using your home’s equity to borrow money, be sure to work with a lender who can separate fact from fiction and help you make educated decisions about your finances.

If you’re ready to get started, apply for a HELOC through Citizens FastLine® today.