Home equity lines of credit used to be a no-brainer when rates were at historic lows. Now, with HELOC rates hovering between 8-10%, homeowners are rightfully questioning whether tapping their equity makes sense. The answer depends entirely on what you're planning to use the money for.
If you're considering a HELOC to pay off high-interest credit card debt, the math is straightforward. Credit cards charging 20-25% APR make even a 9% HELOC look attractive. For a $25,000 balance, switching from credit cards to a HELOC could save you $3,000+ in interest annually. That's real money back in your pocket.
Home improvements present a more nuanced calculation. A kitchen or bathroom renovation can add significant value to your home-often returning 60-80% of the cost when you sell. If the improvements also reduce your energy bills or prevent larger problems down the road, a HELOC can make sense even at current rates.
| Use Case | HELOC Makes Sense? |
|---|---|
| Paying off 20%+ credit card debt | Yes - significant savings |
| Home improvements that add value | Yes - with solid ROI |
| Emergency fund (just in case) | Maybe - proceed cautiously |
| Discretionary spending/vacation | No - too risky |
| Starting a business | No - use business loans |
The biggest advantage of a HELOC is flexibility. You only pay interest on what you actually borrow, and you can draw funds as needed. This makes them ideal for ongoing projects or situations where you're not sure of the total cost upfront. Plus, HELOC interest is often tax-deductible if used for home improvements.
Current rates are higher than we'd like, but they're still lower than most alternative financing options. If you have significant equity built up and a clear plan for the funds, a HELOC can be a smart financial tool. The key is shopping around-rates can vary by a full percentage point or more between lenders.