Can You Open a HELOC and Not Use It?
HELOCs can be a smart way to tap your home equity and access quick cash. Like credit cards, they offer revolving credit and only require minimum monthly interest payments on the money you use. HELOCs also typically have much lower interest rates, ranging from 4% to 10%, while typical credit card rates range from 15% to 30%.
You can also use a HELOC for virtually anything – from home repairs to medical bills.
But should you open a HELOC and not use it? There's a solid case to do just that. If you lose your job, experience a credit mishap, or otherwise no longer qualify, you won't be approved for a HELOC when you need it most.
If you’re considering taking out a HELOC just in case, there are some things to consider.
How Does a HELOC Work?
A HELOC, or home equity line of credit, is a type of second mortgage that lets you borrow from your home’s equity. It works like a credit card, turning your equity into a line of credit you can withdraw from over time, as needed.
HELOCs come with two periods: a draw period and a repayment period. In the draw period, which usually lasts for ten years, you can withdraw from the funds as much as you wish (up to your credit limit) and only need to make interest payments on what you take out. Once you enter the repayment period, you cannot take out any more money, and you have to start paying back the principal on the money you borrowed.
Do You Pay Interest on a Heloc if You Don’t Use It?
You do not pay interest on a HELOC until you pull funds out.
Not only do HELOCs give you funds to pull from in an emergency, but it won’t put you on the hook for interest if you don’t use it. Unlike home equity loans and other mortgage types that charge interest from the start, the big benefit of HELOCs is that you only pay interest on what you’ve withdrawn. So, if you don’t withdraw any money, you won’t pay any interest.
Should You Get a HELOC, Just In Case?
Opening a HELOC as part of an emergency fund may be a good idea.
However, they do come with some costs. So if you have adequate savings, you might save yourself some money avoiding a HELOC without having a plan for it.
A HELOC is secured by your home, so if you eventually draw on it and can't repay, you risk foreclosure. Having a HELOC just in case can also create the temptation to use the loan for non-essential purchases and potentially lead to unnecessary debt.
Another con of opening a HELOC just in case is that you may not use it at all, and if you don’t, you could lose money.
But not much. There are no-closing-cost HELOCs in the market. Shopping around could help you avoid paying closing costs for something you never use.
But be careful. Some lenders also charge “inactivity” fees if you don’t use your line of credit enough. Others charge annual fees similar to the annual fee on a credit card. Others charge fees to close the account.
So, despite the great rates and flexible access to money when needed, HELOCs should still be treated with caution. But what if you took out a HELOC and ended up not using it for what you planned for? In this case, you may consider HELOC cancellation.
How To Close a HELOC
If you opt not to use your HELOC, you might think about closing it altogether. Though this is possible, you might pay an early closure fee to do so. Prepayment fees are not too common for HELOCs, but Bank of America, for example, charges a $450 fee if you close your account within 36 months of opening it. To see if your lender charges one, read your loan documents thoroughly.
Once you’re ready to close out your home equity line of credit, contact your lender and ask for a close-out letter. This is a form you must fill out to authorize the closure of your account. You’ll need to include your name, address, account number, and the signatures of any borrowers on the HELOC, and once done, submit it to your lender.
Can a bank cancel my HELOC?
Your lender can’t close your account unless you fail to make payments, intentionally decrease your home’s value, or misrepresent something in your loan application. However, they may lower your credit limit or freeze your account, which essentially halts any spending on it. This might happen if there’s a significant decline in your home’s value.
Should I close my HELOC?
You may want to close your HELOC if you’re not using it, but some lenders charge a fee for this. If they charge a fee, it may be worth keeping it open and using it at least enough to recoup the closing costs you paid.
Opening a HELOC Without Using It Could Be a Good Idea
It's a smart idea to get credit while you qualify. If you lose your job or your credit score falls, you may not be approved for a HELOC when you need it most.
Check today's HELOC rates and see if you qualify now, because no one knows what the future holds.
