If you’ve been around my blog much, you’ve probably noticed that I’m a fan of Home Equity Lines of Credit(HELOCs). They are flexible, last a long time, and carry lower interest rates than most loans available. One question I’ve gotten a lot lately is, “Should I wait for rates to drop before I get one?” If this is you, I’m glad you’re here. You’ll see that another advantage of HELOCs over other loans is that the rate changes with the times. I’ll explain below.
One of the biggest objections I often hear about HELOCs is the fact that they are a variable rate product. That means that your interest rate isn’t “fixed” like it is for an auto loan or mortgage. In layman’s terms, if your rate is 10% today, it could be 11% next year. That tends to scare some people away from HELOCs, especially if rates are on the rise like we’ve seen in the last couple of years.
While that is a legitimate concern during a rising rate environment, what happens during a season of rate drops, like the one we’re in right now(Nov 2024)? As it turns out, the biggest drawback to HELOCs becomes its biggest strength. Let me show you how.
One of my favorite lines about HELOCs is, “Once you have it, you have it!” What I mean by that is if you have one in place, you can keep it for as long as the lender allows it and use it for whatever you want. You’ve already gotten the hard part out of the way by completing the application process. If you get approved at a rate of Prime + 1%, then it won’t matter if you wait since you’re going to end up with the same lower rate anyway. I believe it’s better to already have the product in place ahead of time so you can use it both when you expect to need it and also when you have an unexpected need arise.
So, withdrawing funds is quick and easy and quite simple. If you are thinking about getting one down the road, what’s stopping you from going ahead and getting it now? The only good reason to wait would be if you didn’t have enough equity in your home, or your income couldn’t support a HELOC. Other than that, there’s no reason to wait. There are still lenders out there who won’t charge an annual fee, and some who don’t charge you to get one in the first place(some places do both!).
By waiting for rates to drop, you could be putting your home value or future earnings at risk. It isn’t guaranteed, but anything can happen. If you’re able to get the amount of a HELOC you know you’ll need, plus your credit and income can support it, why wait? If you don’t like the interest rates today, you can still put the HELOC in place and use it once rates do end up dropping, and you have instant access to funds. Then, if your home value or income decreases—it won’t matter. Once you have it, you have it. You don’t have to requalify each year or justify any withdrawals you make.
My main point here is that your existing HELOC interest rate will drop with any rate changes anyway, so it makes no difference if you do one now or wait until rates drop to a level you like. Plus, if the rate never drops to a level as low as you hoped, you still have access to the funds whenever the rate is as low as it’s going to go. Rates tend to never go as high or as low as people assume they will. So, you need to be prepared to act before that point, since the odds aren’t in your favor. I say that because, as a banker, I’ve seen numerous people get overly optimistic about rate expectations, and they are typically disappointed in the end.
The only reason I would advise anyone to wait for a rate drop before applying would be if the lender charges high fees to apply or hold a HELOC. But, even then, just pick a different lender who doesn’t charge those fees. Competition is too high for you to be at the mercy of one particular lender. You don’t have to use the company that has your mortgage or the bank where you have a checking account. Shop around.
