Does a HELOC make sense when rates are high?

Over the past 18 months, a series of Federal Reserve rate hikes meant to tame inflation have caused borrowing costs to skyrocket. While the Fed doesn't directly dictate lending rates, the benchmark rate has a big impact on what lenders charge for loans. 

And, with the benchmark rate at the highest point in 22 years, it now costs a lot more than it did last year to borrow money. That said, home equity levels are currently high for the average homeowner, and if you're one of them, you may be wondering whether a home equity line of credit (HELOC) could make sense for you, even with today's high rates. 

So, does it make sense to borrow money with a HELOC right now, considering today's elevated rates? Below, we'll break down what you need to know. 

Explore the HELOC rates you could qualify for here now.

Does a HELOC make sense now that rates are high?

The answer to whether any borrowing product is a smart idea is a personal one. After all, only you can determine whether a HELOC — or a credit card, personal loan or another type of borrowing product — aligns with your financial goals and needs.

That said, high interest rates aren't a reason to write off the benefits of a HELOC, provided you need access to the line of credit. That's because a HELOC still provides unique benefits that you can't get from other options — which makes it worth considering when you need to borrow money.

Here's why a HELOC can still make sense even when rates are high.

Lower rates than other options

While interest rates for HELOCs may experience upward movement, they typically remain more competitive than the rates with other lending products. That's because HELOCs are secured by the equity you've built in your home, which provides lenders with collateral. This allows lenders to offer lower interest rates compared to unsecured lending options. 

For example, credit cards, especially if carrying revolving balances, often come with significantly higher interest rates. The average credit card rate was well above 20% earlier this year, and there have been several rate hikes in the time since. But the average HELOC rate was 8.59% as of August 25 — significantly lower than the average card rate.

Personal loans, while more structured and predictable than credit card debt, generally also have higher rates due to their unsecured nature. And, the average personal loan rates can be anywhere from 8% to 36%, depending on the lender and your credit score. 

Learn more about your HELOC options right now.

Larger limits

If you need to borrow a large amount for a home renovation, bill consolidation or another type of expense, a HELOC can make a lot of sense, even when rates are high. That's because the loan limits for HELOCs are typically much greater than they are with personal loans or credit cards.

While it varies, personal loans are generally capped at $100,000. And, credit cards generally come with much lower limits than that. But with a HELOC, you may be able to borrow up to $1 million, depending on the amount of equity in your home. 

So having the ability to borrow much larger sums of money can be a useful tool in certain situations — especially considering that the rates are generally lower on HELOCs than other types of loans.

Loan flexibility and convenience

One of the main benefits of a HELOC is its flexibility. Unlike a traditional loan, a HELOC operates like a revolving credit line, allowing you to borrow, repay and borrow again during the draw period, typically 10 years. 

This flexibility can be particularly advantageous when rates are high. For instance, you can borrow only the amount you need at any given time, reducing the overall interest you pay compared to a lump-sum loan with a fixed rate.

Variable rates offer potential for savings

HELOCs usually come with variable interest rates that are tied to a benchmark like the prime rate. While rising interest rates can cause concern, they also provide an opportunity for potential savings. 

Unlike fixed-rate loans that lock you into a specific rate for the entire term, a HELOC's variable rate can work in your favor when rates eventually decrease. When managed strategically, this variability can lead to lower interest payments over the life of the loan.

Potential for tax benefits

In certain cases and jurisdictions, the interest paid on a HELOC might be tax-deductible, similar to mortgage interest. Consulting a tax professional can help you determine if you qualify for these deductions, potentially making a HELOC even more financially advantageous.

The bottom line

While the current high interest rates might give you pause, a HELOC can still be a practical financial tool with careful consideration and strategic planning. The flexibility, loan limits and other factors make a HELOC a viable option for borrowing — and the lower rates compared to other loan products are a big benefit for borrowers. By understanding the nuances of HELOCs and their benefits, you can navigate periods of higher rates while still achieving your financial goals.