• HELOCs offer homeowners an affordable way to convert some of their home equity into cash.
  • With interest rates expected to decline, adjustable-rate HELOCs may be a good idea for today’s borrowers.
  • Some lenders, like PNC Bank, also offer HELOCs with fixed interest rates for borrowers who prefer more predictable monthly payments.

    • Home Equity Lines of Credit (HELOCs) are a flexible and efficient way to tap into your home's equity and put cash in your pocket. Given how the economic environment indicates decreasing interest rates in 2024 or 2025, some homeowners are considering variable-rate HELOCs, in which the interest rate automatically adjusts to match changing market rates. 

    In this article, you'll learn the basics of how HELOCs work, why they may be a good idea for homeowners in today's economy, and what it takes to get approved for a HELOC. 

    What Is a HELOC and How Does It Work?

    A HELOC (home equity line of credit) enables homeowners to borrow against the value of their homes. HELOCs are open lines of credit that allow homeowners to draw funds up to a pre-determined limit and then repay the amount borrowed plus interest. HELOCs are often compared to credit cards because the fund purchases in much the same way: you can charge amounts against the open credit line, and then repay the debt in installments.

    However, unlike credit cards, HELOCs have clearly defined draw periods and repayment periods. During the draw period, you can borrow funds as needed, up to the limit. And during the repayment period, you pay off the balance plus interest. Depending on the terms of your HELOC, you might start repaying the balance during the draw period, or you might make interest-only payments during this period.[1]  

    Also, unlike credit cards, HELOCs use your home as collateral for the loan.[1] This means that failing to repay your HELOC could potentially result in a foreclosure on your home. It also means that you might get a lower interest rate than you would with unsecured loans (since the use of collateral makes repayment more likely, representing a lower risk for lenders).  

    The Financial Implications of a HELOC

    Because of the way HELOCs are structured, they come with unique financial implications:

    Variable Interest Rates and Payment Fluctuations

    Most HELOCs offer a variable interest rate rather than a fixed interest rate.[2] Variable interest rates automatically adjust to reflect changing market rates. This is good when interest rates are declining because it means you’ll pay less in interest. But when interest rates increase, borrowers pay more in interest. Variable rates mean your payment fluctuates from one month to the next as rates change.

    If you like the idea of a HELOC but would prefer the predictability of a fixed interest rate, consider PNC’s Choice HELOC with a fixed rate lock.   

    Potentially Tax-Deductible Interest

    For tax years 2018 through 2025, HELOC interest is tax deductible for those who itemize tax deductions if the funds are used specifically for the purpose of improving your home.[3] Unless current tax laws are changed, HELOCs secured after 2025 will offer tax-deductible interest for those who itemize deductions, regardless of how the funds are used. Consult with a tax adviser about your unique financial situation.

    When Is a HELOC a Good Idea?

    A HELOC may be a good idea when:

  • You have a lot of home equity. Home equity is the value of your home that you own (as opposed to the amount that is financed. High home equity gives you space to tap into the value of your home more comfortably. 
  • You need funding fairly quickly. A HELOC may allow you to access funds more quickly than other equity options, such as home equity loans or refinancing.
  • Interest rates are expected to come down this year or next (or you can lock in a low flat rate). Interest rates on adjustable-rate HELOCs automatically come down if market rates fall. If you are concerned that interest rates may rise, you might consider locking in today’s rate with a PNC’s Choice HELOC. 
  • You want the flexibility of drawing against a credit limit without the typically higher interest rate of a credit card. If you are unsure of the exact amount you’ll need to borrow, as is often the case with projects like home renovations, it’s nice to be able to draw cash as needed

    • When Is a HELOC Risky?

    HELOCs can be risky when:

  • It's a stretch to make the payments. Before accepting any debt, you should be sure you can comfortably afford the payments. This is especially true of debts that use your home as collateral since failure to repay the loan could result in losing the property.
  • Future increases in interest rates could make the payments difficult to cover. If you choose an adjustable-rate HELOC, rising interest rates would mean an increase in your payments. Give yourself financial space to cover any potential increases. 
  • You have concerns about future income. If your career situation feels unstable, you might choose to wait until your job feels more solid before taking on more debt.
  • Housing prices are declining. If you don’t have a lot of equity, a sudden dip in local home prices could potentially put you “underwater” — meaning that you owe more on the mortgage than the house is worth. This could be problematic if you need to sell for any reason while prices are down because any proceeds from your home sale wouldn’t cover the remaining mortgage balance.

    • Eligibility and Borrowing Capacity

    To be approved for a HELOC, homeowners need to meet specific HELOC requirements: 

    Loan-To-Value (LTV) 

    LTV is a ratio that compares the amount of debt on a property to the property’s market value. For example, if you have $200,000 remaining on your mortgage, and your home appraises for $500,000, your LTV would be 40% (200,000 divided by 500,000). 

    The LTV maximum for a HELOC varies by lender, but many lenders won’t allow the LTV to exceed 75-80%. Lenders want homeowners to maintain at least 20-25% equity in their homes, which reduces the risk to all parties.

    Credit Score 

    Your credit score measures how responsibly you have used credit. As with any loan, your credit score is a factor in determining whether you qualify for a HELOC and for what interest rate you qualify. The higher the score, the more likely you are to qualify and get a favorable interest rate offer. 

    Credit score requirements vary by lender. They may also vary based on the amount of money the homeowner is looking to borrow. While requirements among lenders vary, a credit score of at least 620 is required for HELOC approval.[4]

    Debt-To-Income (DTI) 

    DTI is a ratio that compares the amount of your current debt to your income. For example, if your monthly pre-tax income is $6,000, and your monthly debt payments are $1,500, your DTI is 25% ($1,500 divided by $6,000).

    DTI is used when issuing new loans and lines of credit to confirm a buyer’s ability to cover debt payments. DTI requirements vary by lender and are considered in conjunction with other factors like credit scores and credit limits on the HELOC, so there is no specific DTI percentage that all borrowers must remain below to qualify for a HELOC.   

    Is a HELOC an Option for Lower-Income Individuals?

    HELOCs can be a good idea for lower-income individuals who need access to a smaller loan amount quickly. Take home repair projects, for example. If you don’t have the cash on hand to replace the oven that unexpectedly stopped working, an existing HELOC could secure you the funds needed to replace the oven fairly quickly. And the interest rates could be much lower than if you were to use your credit card[1], which would save you money as you repay the loan.  

    Other Options for Accessing Funds

    If you are unsure about using a HELOC to access needed funds, here are a few additional options to consider.

    Credit Cards

    Credit cards are a convenient way for many borrowers to quickly access funds. Like a HELOC, you can borrow against your credit limit as needed and repay the principal and interest in installments. Some credit cards even offer a 0% introductory APR for qualified applicants. And some cards offer rewards such as cash back on purchases. And, unlike a HELOC, a credit card does not require you to use your home as collateral. However, the interest rate on credit cards is typically much higher than on a HELOC.[1]  

    You can explore your credit card options with PNC Bank to find a card that meets your needs.  

    Personal Loans

    Personal loans are a flexible option for accessing funds. Personal loans can be secured by collateral or unsecured (meaning no collateral is required). A Personal Installment Loan provides access to funds in one lump sum. A Personal Line of Credit provides ongoing access to funds up to an approved credit limit, similar to a HELOC. It’s worth noting that interest paid on personal loans and personal lines of credit is typically not tax deductible, regardless of how the funds are used.    

    Home Equity Loans

    Like HELOCs, home equity loans can tap into your home equity to access cash. There are, however, a few differences between HELOC and home equity loans. While a HELOC is a revolving line of credit, home equity loans disburse funds in a lump sum. Home equity loans may be a good option for borrowers who would be tempted to overspend if given an open line of credit.    

    Cash-Out Refinancing

    Cash-out mortgage refinancing is different from HELOC and home equity loans, completely replacing your current mortgage with a new mortgage with new rates and terms. This form of refinancing may be an attractive option when interest rates drop because it allows you to replace your existing loan with a lower-interest-rate loan. This, in turn, could reduce your monthly mortgage payments and your overall interest expense. However, when current interest rates are higher than the rate on your existing mortgage, refinancing likely wouldn’t make sense because homeowners don’t want to forfeit a lower mortgage rate.    

    You can use the PNC Bank Mortgage Refinance Calculator to see how a refinance would impact your mortgage payments. 

    Next Steps

    PNC Bank offers flexible HELOC options. You can apply for a HELOC online and receive a decision on your application in just a few days. 

    The property securing the CHELOC must be located in a state where PNC offers home equity products. PNC does not offer the CHELOC product in Alaska, Hawaii, Louisiana, Mississippi, Nevada and South Dakota.