If higher mortgage rates have you reconsidering selling your home, that may be a good thing. By staying put, you’re building equity — and that can be a powerful financial tool.

Many homeowners are turning to home equity lines of credit (HELOCs) to leverage their growing equity. With lower interest rates and flexible terms, HELOCs can be ideal for funding home improvements that boost your home's value or covering other necessary expenses.

In a time of rising loan rates, leveraging a HELOC can be a smart, flexible, and cost-effective way to manage your finances and maximize your home's potential. Here’s what you need to know.

What is a HELOC?

A home equity line of credit is a revolving line of credit that allows homeowners to borrow against the equity in their homes. Unlike a traditional home equity loan, which provides a lump sum, a HELOC offers the flexibility to borrow and repay funds as needed, like a credit card. Homeowners can draw from their HELOC during a set draw period, usually five to 10 years, after which they enter the repayment period.

Differences between HELOCs and home equity loans

HELOCs differ from home equity loans in several ways:

• Flexibility: HELOCs give homeowners more flexibility because they allow for multiple withdrawals over time. This enables you to borrow only what you need when needed, rather than committing to a single lump sum upfront.
• Rates: HELOCs typically have variable rates, which can change over time, whereas home equity loans usually have fixed rates.
• Usage: HELOCs are often used for ongoing expenses, while home equity loans are more suited for one-time, significant expenses.

Benefits of getting a HELOC in 2024

There are several good reasons to consider a HELOC:

• Versatility: HELOCs offer more versatility than traditional loans. Homeowners can borrow as little or as much as they need, whenever needed, up to their credit limit.
• Lower rates than credit cards: HELOCs generally offer lower rates than credit cards. According to the Federal Reserve, credit card interest rates averaged 21.51% in May 2024.
• Tax advantages: Interest paid on a HELOC may be tax-deductible if used for home improvements, providing potential savings on your tax bill.

How to use a HELOC

You can use a HELOC in several ways:

• Debt consolidation: Consolidating debt using a HELOC can simplify monthly payments and potentially reduce overall interest costs.
• Home improvements: Investing in home improvements using a HELOC can increase the property's value, providing long-term financial benefits.
• Emergency expenses: A HELOC can provide a financial safety net for unexpected expenses, ensuring you have funds available when needed.

Why now might be a good time

Many homeowners are experiencing significant increases in home equity due to rising property values. According to CoreLogic, homeowners gained $28,000 in equity on average in the first half of 2024. Having a larger amount of equity may mean you have more funds available to access.

It also looks like interest rates won’t go down anytime soon. While the Fed has held off any rate hikes during recent meetings, they still seem hesitant to opt for a rate cut. That could mean that some rates — like those on credit cards — will remain higher, potentially making the lower interest rate on a HELOC more appealing. 

Potential risks and considerations

Before applying for a HELOC, there are some factors to consider:

• Market fluctuations and changes in home value: The value of a home can fluctuate due to market conditions. If the property value decreases, homeowners with less equity who take on a HELOC may struggle financially.
• Variable rates and payment fluctuations: HELOCs usually come with variable rates, which means monthly payments can increase if rates rise. This variability can make budgeting more challenging and increase the overall cost of borrowing.
• Risk of over-borrowing: The flexibility of a HELOC can sometimes lead to over-borrowing. You should consider the ability to repay the borrowed amount to avoid financial strain.

HELOCs can offer a flexible and cost-effective financing option for homeowners in 2024. With benefits such as lower rates than credit cards, debt consolidation, and the ability to fund home improvements or serve as an emergency fund, HELOCs are becoming increasingly popular. However, it is essential to consider the potential risks, including variable rates and market fluctuations, before deciding.

For more information on how a HELOC can benefit you, give us a call or visit our Home Equity page.