Should I Get a HELOC Just in Case?

A home equity line of credit (HELOC) allows you to tap into the equity in your home, so you have convenient access to cash when you need it. Equity is the difference between what you owe on your home and its value. 

A home equity line of credit on standby could provide cash in an emergency. Some lenders let you draw on a HELOC as needed, so you’ll only pay interest on the amount you borrow and won’t owe anything on your HELOC until you draw funds. 

Other lenders have different HELOC rules and require a minimum draw at the beginning. Plus, some charge a fee to open or maintain your HELOC, so opening one to use as an emergency fund may not be free. Whether to get a HELOC just in case an emergency occurs might make sense for your situation. Understanding the rules and fees, and weighing the pros and cons, can help you decide.

What are the benefits of having a HELOC just in case?

A HELOC can be helpful in an emergency because it’s a revolving credit line you can borrow against as needed. After a typical initial draw period of five to 10 years, you repay what you borrowed with interest over 20 years, in many cases. And if you never need to touch your credit line—assuming your lender doesn’t require you to do so at closing—you never pay interest.

Once you apply for a HELOC, it can take a few weeks to a few months to get approved. If you need cash right away, you may not have time to wait for lender approval on a loan or line of credit, so having a home equity line of credit ahead of time can help you prepare.

Other benefits of getting a HELOC just in case include:

• Convenient access. Depending on the lender, you might be able to draw from your credit line using a debit card, paper checks, or transfers to a linked bank account.
• Higher credit limits. You may be able to borrow more with a HELOC than a credit card or personal loan, depending on how much equity you have in your home.
• Interest rates. Many HELOC rates are variable-rate, but they are often lower than the double-digit annual percentage rates (APRs) on credit cards.
• Fixed-rate option. Certain lenders offer a fixed-rate option for a HELOC, which allows for predictability with repayment. 
• Flexibility. You might open a HELOC for emergencies, but you could also use it for other needs. 

What are the downsides to having a HELOC just in case?

A home equity line of credit is often similar to a credit card in terms of how it works. Both are revolving credit lines. 

But a HELOC is different in a few key respects:

• It may require you to pay upfront or annual fees, including closing costs and maintenance fees. 
• Credit cards are unsecured, but your home secures a HELOC. 
• Some lenders require a minimum draw, and at least one requires you to draw 100% of the funds at origination. 

Typical HELOC closing costs are 2% to 5% of your credit line, regardless of how much of the credit limit you use. You’ll pay the cost upfront, and your lender may charge an annual maintenance fee to keep your credit line open if you don’t use it. 

But the more significant downside is foreclosure risk. If you use part of your HELOC to cover an emergency and then default on repayment, you could lose your home to foreclosure. 

In some cases, additional challenges include the following:

• Rate fluctuations. If the variable rate on your HELOC increases, any outstanding balance will result in more interest. Some lenders offer fixed-rate HELOCs, but you may be subject to an initial 12-month variable rate. 
• Minimum draw requirements. Lenders may require a minimum draw once you open your line of credit. For example, you may need to withdraw $10,000 right away, regardless of whether you have an emergency. You must then pay it back with interest. As we mentioned, at least one lender—Figure—requires drawing 100% of the funds at origination. This structure wouldn’t make sense if you’re looking to use a HELOC as an emergency fund. 
• Potential for overspending. You might get a HELOC, but you risk the temptation to dip into it and create unnecessary debt. 
• Suspension or reduction. Lenders can review your HELOC and reduce your credit line or suspend it if they see a significant change to your home’s value, creditworthiness, or ability to pay. 

If you only plan to use your HELOC for emergencies, it’s essential to read the fine print, so there’s no room for surprises should you find yourself in an emergency.

Our expert’s take

Natalie Slagle

CFP®

Before considering a HELOC, we recommend our clients establish their emergency fund within their bank savings account. We consider this a prerequisite because it eliminates unnecessary fees, removes the risk of foreclosure, and creates better money habits all around. Once a client has their emergency fund in place at the bank, we discuss the benefits and drawbacks of establishing a HELOC. Knowing what future purchase goals lie ahead can help determine whether establishing a HELOC is viable. For example, for clients who know they want to do larger renovation projects but aren’t sure when they’ll start or what the cost will be, establishing a HELOC could be smart as they work out the details.

If I get a HELOC just in case, what can I do with the money?

HELOCs are flexible. You can spend the money on whatever you need. 

Does that mean you should avoid HELOCs for non-emergencies? Not necessarily, if you’re using the money to fund a specific goal or outcome that can offer a financial benefit. 

Use	Urgent	Non-urgent	Don’t use
Unexpected medical bills	✅
Day-to-day living expenses if unemployed for a long time	✅
Emergency home repairs not covered by insurance	✅
Unexpected veterinary bills if a pet is ill or injured	✅
Family emergencies	✅
Unexpected vehicle expenses	✅
Elective medical procedures not covered by insurance		✅
Home renovations or improvements		✅
Consolidate high-interest credit cards or other debt		✅
Pay education expenses for you, your spouse, or your child		✅
Start a new business venture		✅
Purchase a second home or vacation home		✅
Pay for a vacation			✅
Buy a new car			✅
Pay for college if federal student loans are more affordable			✅

Using a HELOC to consolidate debt could save you money if you can repay it at a lower interest rate. Using a HELOC for emergency expenses can also help you through a tough spot. For instance, you might tap into your HELOC to pay off unexpected medical or veterinary bills or emergency home repairs your home insurance doesn’t cover. It can also help you through job loss. 

At the same time, tapping into your HELOC may not be a good idea for other uses, such as buying a new car or paying for a vacation. Borrowing from your home to invest in real estate or start a new business is also risky. And while tapping into your home equity to pay for college can make sense for some families, be sure to explore your options for federal student loans and other financial aid. 

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Tip

The debt could put your home at risk of foreclosure if you can’t repay your credit line. Consider your plan for repayment before borrowing against your home. 

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How long can I keep a HELOC open without using it?

As we mentioned, HELOCs have an initial draw period that may last five to 10 years. You can access your credit line and often make interest-only payments during this time. Your lender might offer the option to make principal payments as well. 

What if you don’t use your credit line during the draw period? 

Your lender might charge an inactivity fee along with an annual membership fee. If you close your HELOC early, you might also have to pay a cancellation fee. 

But in general, lenders cannot close a HELOC without a reasonable justification, which can include:

• Significant decline in the equity value of your home.
• Fraud or misrepresentation (for example, providing false income information).
• Action or inaction that harms the lender’s security in the home.
• Changes to your financial situation that might preclude you from repaying the money you borrow.

That list doesn’t include simple inactivity, so opening a HELOC just in case wouldn’t cause your credit line to be closed later, but you may still pay an inactivity fee. 

What happens if I get a HELOC just in case but don’t use it? 

Once the draw period on a HELOC ends, your credit line closes, and you enter the repayment period. You must make principal and interest payments toward your balance if you used part of your credit line. 

If you had a zero balance, you’d have nothing to repay. Your credit line would close. If you were paying an annual fee during the draw period, it would go away. 

When considering a HELOC, it’s smart to ask about fees before applying. Standard fees include:

• Origination fees: About 1% of your total credit line amount
• Monthly or annual maintenance fees: Around $300 – $400 per year 
• Closing costs: 2% – 5% of credit line
• Prepayment penalties: About 2% of loan balance 
• Inactivity fees: $50 or less
• Account closure fees: About 2% of the loan amount or a flat fee 

Let’s say, for example, that you open a HELOC for $50,000. The origination fee may be $500, and total closing costs could range from $1,000 to $2,500. If your lender charges a prepayment penalty or early closure fee, you might face fees of $1,000. You’ll also pay interest on the amount you withdraw and may be subject to monthly or annual maintenance fees. 

Understanding the fees can help you get a better idea of what a HELOC might cost—even if you never use it. 

How long do I need to be in my home to qualify for a HELOC?

No specific waiting period is required to get a HELOC. Sometimes, you can apply for a home equity line of credit within a month or two of closing on a property. 

What matters more to lenders is how much equity you have in the home. Lenders often expect you to keep 15% to 20% equity in the home, measured by your loan-to-value ratio (LTV). 

LTV is your mortgage debt divided by a home’s appraised value. 

How to calculate home equity

The formula for calculating your LTV is as follows:

Current mortgage balance / Current appraised value = Loan-to-value ratio

Here’s a more detailed example: If you owe $200,000 on your mortgage and your home is worth $300,000, your current LTV is 67% ($200,000 / $300,000).

Imagine applying for a HELOC, and your lender sets a limit of 80% LTV. Your new HELOC, combined with your mortgage, cannot exceed 80% of your home’s value.

Now, you need to determine your new LTV if you add debt to your home by taking out a HELOC. 

If you take out a $40,000 HELOC, you have a total of $240,000 in loans against your home. And if you divide your new loan total of $240,000 by the appraised value of $300,000, you’ll get an LTV of 80%.

How to get a HELOC

Whether you should get a HELOC just in case depends on your situation and needs. Should you decide to move ahead with a HELOC, the next steps are: 

1. Calculate your LTV to determine whether you might be eligible for a HELOC. 
2. Consider how much of your equity you want to access.
3. Compare HELOC rates from different lenders, including variable and fixed-rate options.
4. Consider getting preapproved if you can obtain rate quotes without affecting your credit. 

Once you choose a lender, you can apply, submit supporting documents, and wait for approval.

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Tip

Thinking about a HELOC for home improvements? The IRS allows you to deduct HELOC and home equity loan interest when you use the proceeds to “build, buy, or substantially improve” the property that secures the loan. (This is an option for taxpayers who itemize deductions but not those who take the standard deduction.)

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If you’re considering a home equity line of credit, check out our guide to the best HELOC rates and lenders. For more guidance on tapping into your equity, check out our resource, Is a Home Equity Loan a Good Idea?