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Home equity lines of credit (HELOCs) let you borrow against the equity you've built in your home up to a set credit line. With homeowners still feeling stuck in their homes—and HELOC interest rates dropping faster than mortgage rates—HELOCs can be a popular option for getting a relatively low-rate loan. But consider the pros, cons and alternatives before applying.
HELOC Trends and Insights for 2025
The Federal Reserve's latest report reveals trends in HELOC activity and balances during the third quarter (Q3) of 2024. These can also offer insights into what you might need to know about HELOCs in 2025.
- Total HELOC balances continue to climb. The total outstanding balance on HELOCs has steadily increased since 2021. It reached $387 billion in Q3 of 2024, a $7 billion increase from the second quarter (Q2).
- More people are opening HELOC accounts. The total number of open HELOC accounts significantly dropped when people began refinancing into lower-rate mortgages during the pandemic. The number of accounts hasn't returned to pre-2021 levels, but there were 80,000 more accounts in Q3 than in Q2 of 2024.
- Homeowners are getting more access to credit. Credit limits on HELOCs can increase when homeowners pay down their mortgages or if their home's value increases. Overall limits increased by $12 billion from the first quarter (Q1) to Q3 of 2024. If the trend continues, the rising limits could give homeowners more access to financing in 2025.
- HELOC utilization is steadily increasing. Balances have increased faster than credit limits during the past few years. The overall HELOC utilization rate is still under 40%, which is where it was at in the late 2010s. But it climbed from 37.74% to 39.81% over the past three years.
- HELOCs are susceptible to check fraud. Criminals have also caught on to the popularity of HELOCs and they're trying to take out fraudulent loans. They sometimes take over accounts or write fake HELOC checks. Learn more about how you can protect yourself from HELOC fraud.
- Lenders still promote introductory offers. Similar to previous years, some lenders advertise introductory annual percentage rate (APR) offers. You may find offers with very low, or even 0% APR, for a short time.
It's important to understand these trends within the context of the past few years. Homeowners who bought or refinanced into 2% to 3% mortgages may still feel stuck in their homes because moving could mean taking out a 6% to 7% mortgage.
The Fed rate is expected to continue dropping since its recent peak in late 2023. However, it doesn't affect mortgage rates directly, and mortgage rates likely won't drop below 5% anytime soon.
The combination of events is making HELOCs a popular option, especially for those considering renovating or upgrading their homes instead of moving. Lenders who want to attract homeowners in this position may be more likely to expand their lending criteria, create new products or offer more attractive terms to borrowers.
Learn more >> How Reduced Interest Rates Affect Mortgage Costs
How Do HELOCs Work?
A HELOC is a second mortgage that lets you access some of the equity you've built in your home on an as-needed basis up to an approved credit limit. Instead of receiving a lump-sum payment as you would with a home equity loan, however, a HELOC is a revolving credit line that allows you to borrow money, repay it and borrow again repeatedly during the loan's draw period.
The draw period typically lasts 10 years, during which time you'll likely only make interest payments. Once the repayment period begins, you'll pay back principal and interest, usually over a 20-year period. HELOCs usually carry a variable interest rate, which means your rate and payment can fluctuate with market rates. Because they're secured loans, they may offer lower rates than other options.
Pros and Cons of HELOCs in 2025
HELOCs can be a good option if you have solid credit and enough equity, but they also have drawbacks and aren't a great fit for every situation.
Pros
- They tend to have lower rates than alternatives. HELOCs often offer lower interest rates than credit cards, unsecured personal loans and personal lines of credit.
- Rates may continue dropping in 2025. HELOCs tend to have variable interest rates that automatically change based on the prime rate. In turn, that rate tends to move with the federal funds rate. People expect the Fed to continue dropping rates in 2025, which could make HELOCs less expensive.
- An intro offer might align with the rate drops. You could look for a HELOC that has a low intro offer for the first six to 12 months, and benefit from the low rate while you wait for benchmark rates to drop.
- Your interest payments might be deductible. The interest you pay on HELOC draws might be tax deductible if you itemize deductions and use the money to substantially improve—not simply repair or maintain—your home.
Cons
- Rates might not drop. Although rates are expected to drop, there's no guarantee this will happen. If you've already taken loans out against your HELOC, you might get stuck accruing more interest and paying more than you expected each month.
- You lose equity in your home. Lenders often market HELOCs as a way to use or tap the equity you've accrued in your home, but you're giving up that equity when you borrow against your home.
- You could wind up underwater. Although average housing prices tend to increase over time, your home's value might not. You could find yourself underwater if the balance on your mortgage and HELOC combined exceeds your home's current value, which can limit your options because you might need to cover the difference if you want to sell your home or refinance.
Is a HELOC a Good Idea?
Opening a HELOC might be a good idea, but there are a few factors to consider:
- The impact on your loan-to-value (LTV) ratio: Consider how borrowing against your home will affect your combined LTV—which depends on your primary and secondary mortgages. If your home's value drops, you could wind up underwater.
- The offers you receive: Compare HELOC offers to each other and to other types of credit. Even if you get a good offer, consider what might happen if interest rates stay flat or rise while you have an outstanding balance.
- How you plan to use the money: HELOCs and home equity loans can be good options for home improvement projects because you might be able to deduct the interest payments.
- The account fees: Some people open a HELOC without taking a draw just in case they need to borrow money for an emergency. It's not necessarily a bad idea, but look for options with low or no closing costs, maintenance and inactivity fees. Also, be aware that you don't want to rely on a HELOC as your only emergency fund because lenders can lower your credit limit, freeze or close your HELOC without warning.
HELOCs also aren't necessarily the best fit for certain purchases or debt payoff strategies. For example, you might not want to use your home as collateral to borrow money for a vacation or purchase investments. Similarly, even if using a HELOC to consolidate credit card debt might help you save money, you're taking on a new risk because falling behind on payments could lead to foreclosure.
Learn more >> Should You Take Out a HELOC?
Alternatives to HELOCs
Other types of loans and credit accounts could be a better option depending on your offers, how you plan to use the money and your overall financial situation. Here's a breakdown of HELOC alternatives.
| Home Equity Loan | Cash-Out Refinance | Personal Loan | Intro 0% APR Credit Card |
|---|---|---|---|
| Collateral required? | |||
| Yes | Yes | No | No |
| Approval time | |||
| Two to eight weeks | Three to eight weeks | Instant | Instant |
| Current interest rates | |||
| 6.5% to 8.5% | 6% to 7% | 7% to 36% | 0% and then over 20% |
| Repayment terms | |||
| Monthly payments for a specific period | Included in your new mortgage | Monthly payments for a specific period | Minimum monthly payments |
| Best for | |||
| Home improvement projects and emergencies | Large, one-time expenses when you can also lower your mortgage rate | Small to medium one-time expenses if you don't have or want to use home equity | Borrowing with a plan to repay the loan during the intro period |
Home Equity Loan
A home equity loan is similar to a HELOC because you're using your home as collateral to get a second mortgage. However, home equity loans are installment loans that often have fixed monthly payments and interest rates. A loan might be a better option if you need the entire loan amount upfront.
Learn more >> Home Equity Loans an Increasingly Popular Way to Tap Equity
Cash-Out Refinance
Cash-out refinancing is when you refinance your mortgage, borrow more than your current balance and keep the difference. A cash-out refinance could be a good option if you're considering a refinance to lower your interest rate, decrease your monthly payment or get rid of your mortgage insurance.
Personal Loan
A personal loan is an unsecured installment loan, which means you don't need to have equity in your home or use your home as collateral. Unlike HELOCs, personal loans tend to have fixed interest rates and they don't offer promotional rates. There are no closing costs, but some lenders charge origination fees, which are often a percentage of the loan amount. However, you might be able to find a low-rate loan that doesn't have any fees if you have good to excellent credit.
Learn more >> HELOC vs. Personal Loan: Which Is Better?
Intro 0% APR Credit Card
A credit card with an intro 0% APR offer can also be a good option. You can use the card for big expenses or transfer funds to your bank account, and your balance won't accrue interest during the promotional period. Some of the best credit card offers come with a 21-month intro 0% APR period, and a few also offer rewards on your purchases. Alternatively, you could look for a rewards card that has a large intro offer and a shorter intro period.
Frequently Asked Questions
Many people expect the Federal Reserve to cut the federal funds rate several times in 2025, which could also lead to HELOC rates dropping. However, borrowing money based on an assumption that rates will drop could be risky.
HELOCs often have a variable interest rate. However, you can find HELOCs with fixed interest rates if you want to be certain that your monthly payment won't change. Some lenders also give borrowers the option of converting variable-rate draws to a fixed interest rate. And you may even be able to convert the loan back to a variable-rate loan if interest rates drop.
Lenders can set their own eligibility requirements, but you'll generally need to have at least 15% to 20% equity in your home, good credit and a debt-to-income ratio (DTI) under 44%. The lender may also require an appraisal and proof that you have homeowners insurance. These factors can also affect your credit limit and interest rate.
Monitor Your Credit to Find the Best Offers
Whether you're looking for a credit card, personal loan or home equity financing, your credit history and score can greatly impact your options and offers. Get your credit report and FICO® Score☉ for free from Experian, and you'll also get complimentary monitoring and alerts. Experian members can also see personal loan and credit card offers based on their unique credit profiles.