Suze Orman says to be ‘very, very careful’ before you do this — but for some people it can be a savvy money move

Home equity lines of credit (HELOCs) — which are loans, secured by your home, that give you a revolving line of credit — are very popular for homeowners right now. In the first two quarters of 2022, HELOC activity grew to the highest level since the first half of 2007, with lenders originating more than 807,000 new HELOCs totaling almost $131 billion, according to CoreLogic. 

That may be thanks, in part, to the fact that American homeowners are now sitting on an average of $300,000 in home equity, according to CoreLogic, and HELOCs are one of the most affordable types of loans (see some of the lowest HELOC rates you may get now here). Indeed, if borrowers are “in a good position to make their payments, these loans can provide them with cash they can use to fund major expenses, like home renovations, at rates lower than what they might find with a personal loan or a credit card,” says Jacob Channel, senior economist at LendingTree.

But Suze Orman has a message about HELOCs: “Please be very, very careful if you are considering borrowing against the equity in your home. It is very risky. The one thing I need you to understand is that your home is the collateral for a HEL and HELOC. If for some reason you can’t keep up with the repayment of the loan or line, you are at risk of losing your home,” writes Orman.

She’s exactly right: One of the biggest risks of a HELOC or home equity loan is that the loan is secured by your home, so if you don’t pay it, you can lose your home. That said, if you know you can deal with your HELOC payments, the low rates make a HELOC especially compelling right now. (You can see some of the lowest HELOC rates you may get now here)

“Taking out a HELOC may seem scary, but it really isn’t if you take the time to understand what it is, and consider the impact it may have in your short-, medium- and long-term financial goals, as you should do with any major financial decision,” explains Zeenat Sidi, president of digital products and services at loanDepot. Here’s what you need to know.

What to know about a HELOC

Home equity lines of credit (HELOCs) and home equity loans can be advantageous for those looking to pay off high-interest debt or pursue home improvement projects, thanks to their relatively low interest rates. “For responsible borrowers, namely those who are good about keeping up with their payments and whose finances aren’t stretched to their breaking points, HELOCs and home equity loans are unlikely to pose a major risk,” says Channel. (You can see some of the lowest HELOC rates you may get now here)

That said, you risk losing your home if you don’t pay them off. “This isn’t found money and this isn’t the same as going to the ATM and withdrawing your own money from your account. A HELOC is borrowing, which must be repaid with interest and using your home equity as collateral for the loan, in the event of a default, is not an obligation you can just walk away from,” says  Greg McBride, chief financial analyst at Bankrate.

Adds Kate Wood, home expert at NerdWallet: “Using your home as collateral puts you at potential risk of foreclosure. That additional risk is one reason why interest rates are higher for second mortgages than for purchase loans,” says Wood.

While rates on home equity loans are fixed, on HELOCs they tend to be variable — and that can make repayment challenging. HELOCs are typically composed of a two-part structure, most commonly a 10-year draw period in which the borrower can withdraw as much or as little money as they’d like while only paying interest, followed by a 20-year repayment period during which money can no longer be withdrawn, and the borrower must begin to pay back the principal in addition to interest. “By the time the full repayment is due, you’ll not only have your principal to pay back, but also interest on that principal, making it a pretty steep hill to climb if you aren’t in a great financial position,” says Seth Bellas, branch manager for national mortgage lender Churchill Mortgage. (You can see some of the lowest HELOC rates you may get now here.)

Borrowers should also know that if they do get a HELOC and run into issues paying it back, they shouldn’t hesitate to reach out to their lender to ask for help. “The sooner you get in touch with your lender about issues you’ve run into, the easier it often is to resolve those issues without losing your home,” says Channel. Other potential downsides include having to make an extra payment each month, having to deal with a variable interest rate and potentially having to pay fees or penalties on what you borrow. 

Another potential downside to tapping into your equity is the temptation to leverage it in ways that could ultimately be very dangerous, like using funds from HELOCs to pay off credit card or student loan debt. “One of the primary reasons we advise clients to steer clear of products like HELOCs is that using one to pay other debt just kicks the can down the road, and if you finally arrive at a place where you can’t kick it any further and lack of funds to repay the debt, you could lose your home,” says Bellas.

All caveats aside, it can be smart to get a HELOC if you’re planning on using the money you get responsibly. If you’re in a position where you have stable employment, are financially secure and want to access some of your home equity, HELOCs can be a good option. “It can be smart if you’re using the money to renovate your kitchen instead of buying a bunch of NFTs, if you’ve built a decent amount of equity in your home and if you can be reasonably sure you’ll be able to pay back what you borrow,” says Channel.

As for whether right now is a good time to get a HELOC, Americans across the country are sitting on a substantial amount of home equity that can be tapped, which makes getting a HELOC tempting, as the more equity you have, the easier it will likely be to qualify for one. “On the other hand, rising rates have made paying off a HELOC more expensive. This, coupled with what could be a recession on the horizon, might make paying back a HELOC more challenging for some,” says Channel.

With mortgage interest rates on the high side and many homeowners having bought or refinanced when rates were near historic lows, most homeowners would end up with a higher interest rate on a larger loan if they were to do a cash-out refinance, sys Wood. “With a HELOC, since it’s a second mortgage, the interest rate on your primary home loan doesn’t change,” says Wood. (You can see some of the lowest HELOC rates you may get now here)

Of course, it’s critical to seek out responsible lenders who adhere to conservative underwriting guidelines to ensure that they are making a smart decision. “Before you apply for a HELOC, consider how much money you really need and how you intend to use it. Be sure to factor in interest rates, associated fees, tax inclusion and monthly payment installments as you make your decision,” says Kyle Enright, president of mortgages at Achieve.