3 HELOC mistakes to avoid this March
The average home equity amount grew 6% year-over-year, according to a report released this week. While that level was down slightly from the end of last year, it's still a sizable amount, averaging $313,000 currently. With this much to potentially borrow from and with interest rates on home equity lines of credit (HELOCs) materially lower than many alternatives, homeowners in need of extra financing may be seriously considering this product right now.
While a HELOC has multiple timely benefits worth exploring this March, there are also some costly mistakes that should be avoided. By circumventing the mistakes below, homeowners will better position themselves for HELOC borrowing success both this month and in the months and years that follow. Below, we'll break down three to know now.
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3 HELOC mistakes to avoid this March
To boost your long-term chances of success with a HELOC, be sure to avoid making these three mistakes this March:
Waiting for rates to fall further
HELOC interest rates declined for much of 2024. Then they hit an 18-month low in January and followed that by falling to a two-year low in February. So it's understandable if some homeowners think that the trend will continue. And it may. But waiting for rates to fall further will inevitably delay securing the financing that's already needed now. Waiting also isn't necessary with a HELOC as rates on the product will adjust independently each month, thanks to a variable rate. So even if rates were to fall further in April or May, the HELOC you secure in March will benefit, too. Acting now, then, could be beneficial.
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Not calculating a variety of repayment costs
Because HELOC rates have been declining and because rates change here monthly, borrowers must calculate a variety of potential but realistic repayment costs before securing the line of credit. HELOC rates can increase as easily as they've fallen in recent months and an uptick is not completely unrealistic to expect, particularly if inflation remains as stubborn as it has been over the last four months.
So, before formally applying, crunch your HELOC amount tied to a series of different rates, perhaps by a significantly higher rate than currently available. Since your home is collateral in these exchanges – and because you can lose it to the lender if you fail to make repayments – you'll want to know precisely what you can and can't afford. And, if a HELOC is too risky in today's climate, it may be worth exploring a fixed-rate home equity loan as an alternative.
Assuming you can qualify for an immediate tax deduction
Amid tax filing season and with the knowledge that HELOC interest is possibly tax-deductible if used for eligible home repairs and renovations, prospective borrowers may be eager to apply for a HELOC to secure that tax deduction. But any HELOC secured in 2025 won't qualify for a tax deduction until 2026. And it will need to be used for items like kitchen renovations or remodels or similar projects and not items like debt consolidation to qualify. That doesn't mean that a HELOC can't still be valuable, but it does mean that expectations of an immediate tax benefit will need to be tempered, even if the line of credit is opened before April 15.
The bottom line
A HELOC can be a smart and effective borrowing tool, especially in today's slightly cooler rate climate. However, it will need to be approached strategically, which means avoiding the above simple-to-make mistakes. By avoiding these three missteps, homeowners looking to borrow with a HELOC will boost their chances of success both this March and over the full HELOC draw and repayment periods.
