Does HELOC Affect Your Credit Score? | Chase (2024)

A HELOC stands for a home equity line of credit, and if you decide to take one out to access funds, it could directly affect your credit score. Additionally, taking out a HELOC requires a lender to run a hard inquiry—this can temporarily decrease your credit score by a few points.

There are multiple factors that can directly affect your credit score, from payment history to credit mix (the different types of accounts you have). Some items, such as HELOCs, can be slightly more difficult to understand within the context of credit scores, but they can still have an impact depending on how you manage your account.

In this article, you will learn about:

  • What a HELOC is
  • Why someone would open a HELOC
  • The benefits of a HELOC
  • The risks of a HELOC
  • HELOC affecting credit utilization
  • How a HELOC can improve your credit

What is a HELOC?

A home equity line of credit (HELOC) is a line of revolving credit where you borrow against the value of your home.

For example, let’s say you are looking to pay off a large balance, such as medical bills, but you don’t have cash on hand to pay for it now. When you’re in a pinch, you may be able to borrow against your home’s equity — the difference between your home’s current market value and what you still owe towards your mortgage. This difference can become accessible to you as a line of credit. Lenders will let you borrow up to a certain percentage of this amount--around 60-85%, depending on factors such as your credit score and debt-to-income ratio.

Like many other forms of credit, HELOCs come with interest rates. These can either be fixed (the same flat rate for the life of the loan) or variable (the percentage changes due to market fluctuations) which affects how much you owe back in interest.

This is where having a good credit score can help you earn higher amounts in credit and land lower interest rates. When you enroll in Chase Credit Journey®, you can view your free credit score and learn more about what it means so that you can make an educated financial decision about opening a HELOC.

Why would someone open a HELOC?

There are sound reasons that you might want to choose a HELOC as opposed to other lines of credit, like personal loans, for a home improvement. Making upgrades to your home can help increase its value and bring in more interest from future buyers if you plan to sell your home. Depending on your lender, it’s possible that you can also deduct the interest paid to put towards building or improving your home. Money spent towards home improvements may even be tax deductible, helping you to invest your money into your home.

HELOCs generally come with lower interest rates compared to some other types of loans. For example, you may want to take out a HELOC to pay off credit card debt that comes with higher interest rates. You could refinance your higher interest rates associated with your credit card by using a HELOC to pay off those debts and then paying off the HELOC loan that comes with a lower interest rate.

Note: Always check with your lender to make sure you understand the terms of the loan before taking out a HELOC.

What are some benefits of a HELOC?

As you can see, HELOCs can be quite beneficial depending on your financial situation. They can:

  • Provide an additional line of credit — this can be helpful if you are in need of emergency-related funds, such as large medical bills.
  • Come with lower interest rates — other lines of credit, such as credit cards, often come with higher interest rates.
  • Positively affect your credit score — if you manage your account responsibly, you can help build your payment history, a major factor when determining your credit score.
  • Help improve the value of your home — if you’re using a HELOC to upgrade or rebuild, you could potentially increase the value of your home and sell it at a higher price to future buyers.
  • Act like a second mortgage — a HELOC won’t affect your existing mortgage payments.

What are the risks?

HELOCs can be helpful for a wide range of reasons, but it’s important to understand the risks associated with them before making the decision to take out this type of credit. These include, but are not limited to:

  • The potential to put your home at risk — because your home is considered collateral, not making your payments could make your home vulnerable to foreclosure.
  • The potential to reduce your home’s equity — if the prices of homes drop, it’s possible you could owe more than what your home is valued at.
  • Higher payments after the pay period ends — the draw period is the duration that you can take money out from your available credit. During this time you will only need to pay the minimum payment back each month. Once the draw period is up, you will need to repay the loan and interest in the agreed upon period of time.
  • The potential to negatively impact your credit score — if you don’t make your payments on time, your credit score may decrease.

Additionally, keep in mind that not all lenders will offer HELOCs.

Does a HELOC affect credit utilization?

Credit utilization is the ratio of how much you use of your credit against the total amount of credit available to you. The more you use up your total line of credit, the higher your credit utilization ratio.

A HELOC could help you improve your credit utilization if you decide to use the funds from the HELOC to pay off high credit card balances. Paying off these large bills can potentially lower your credit utilization and may improve your score. However, keep in mind you will still need to pay the funds from your HELOC back later. If you aren’t careful, this could elevate your financial risk.

Can a HELOC help improve your credit?

If you make your payments on time, a HELOC has the potential to improve your credit. Because payment history is a crucial factor in maintaining a good credit score, you’ll want to make sure you’re meeting your monthly payments. By increasing your credit mix by adding a diverse account and making payments on time, you could positively improve your credit score and reap the many benefits associated with this.

It's always important to carefully manage your funds, especially when it comes to HELOCs — you could see not only a decrease in your credit score but you could also be putting your home at risk. Making your payments on time and budgeting appropriately can help benefit you and may improve your credit.

In conclusion

While not always the first option when it comes to accessing lines of credit, HELOCs can be a sound option depending on your specific financial needs and current situation. Whether you’re looking to improve your home, pay off large balances or secure lower interest rates, a HELOC could be the right choice for you as long as you consistently make your payments on time.

Does HELOC Affect Your Credit Score? | Chase (2024)

FAQs

Does HELOC Affect Your Credit Score? | Chase? ›

Having more available credit and not using much of it will help your score. Although a HELOC is considered revolving credit, similar to a credit card, it won't impact your credit score. This is because a HELOC is secured by your home and FICO® is designed to exclude the HELOC from your credit utilization ratio.

Does getting a HELOC lower credit score? ›

HELOC applications require a hard credit pull, which does temporarily lower your credit score. Closing a HELOC and carrying a big debt balance could lower your credit score. Using HELOC funds to pay off other, higher-interest debt can improve your credit score. Timely HELOC payments help build a strong credit history.

Is there a downside to having a HELOC? ›

Depending on how you use the funds, you might also get a tax write-off. The cons are that HELOCs use your home as collateral, they can make it easy to overspend, and they have variable rates that can rise. What are the risks of HELOCs in 2024?

Does a HELOC hurt your debt to income ratio? ›

Having a HELOC could increase your debt-to-income ratio, making it more difficult to be approved for other loans or credit. Set Withdrawal Period. All HELOCs come with a draw period, typically 10 years.

When should you not do a HELOC? ›

Experts advise against using loan money to buy stocks—you can possibly lose the money and be stuck with a loan you can't afford to repay. You should also avoid using a HELOC to invest in luxuries like vacations, since the money will be gone quickly without an asset to sell if you end up needing the money down the road.

Are HELOCs ever a good idea? ›

Generally, a home-equity loan or Heloc is great for folks who are working full time, have predictable income, can afford the additional monthly payment and have a credit score above 640,” says Jeff Levinsohn, CEO of equity tracking platform House Numbers.

Is a HELOC considered bad debt? ›

A HELOC can be a worthwhile investment when you use it to improve your home's value. But it can become a bad debt when you use it to pay for things that you can't afford with your current income and savings.

What is the monthly payment on a $50,000 HELOC? ›

What is the monthly payment on a $50,000 HELOC? Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $411 for an interest-only payment, or $478 for a principle-and-interest payment.

Is a HELOC a trap? ›

Watch out for balloon payments: If you don't manage your HELOC monthly payments properly, you could be hit with a large “balloon payment” at the end of your repayment period. This large payment can trap you in a cycle of debt if you can't pay it off or, worse, could result in losing your home.

Can I pay off a HELOC early? ›

Borrowers often wonder if they can pay off their home equity line of credit (HELOC) early. The short answer? A resounding yes, because doing so has many benefits. If you're making regular payments on your HELOC, you may be able to pay off your debt sooner, so you're paying less interest over the life of the loan.

Is a HELOC high risk? ›

Your home is on the line

The stakes are higher when you use your home as collateral for a loan. Unlike defaulting on a credit card — whose penalties amount to late fees and a lower credit score — defaulting on a home equity loan or HELOC could allow your lender to foreclose on your home.

Can I open a HELOC and not use it? ›

A home equity line of credit offers you access to a specified amount of money, but you do not have to use any of it. At any time, you can pay off any remaining balance owed against your home equity line of credit.

Do you need an appraisal for a HELOC? ›

Most HELOC lenders require an appraisal to determine the current market value of your home, your current equity, your creditworthiness, and your maximum credit limit. HELOC appraisals are often less extensive than those for a traditional mortgage.

What are the disadvantages of a HELOC? ›

Cons of HELOCs
  • Often Variable Interest Rates. Generally, HELOCs have variable interest rates, meaning the interest rate can fluctuate based on market conditions. ...
  • Risk of Overborrowing. Like a credit card, HELOCs are a form of revolving credit. ...
  • Potential for Losing Your Home. ...
  • Closing Costs and Fees.
May 14, 2024

Is it smart to get a HELOC right now? ›

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.

Is HELOC a second mortgage? ›

A second mortgage is another home loan taken out against an already mortgaged property. They are usually smaller than a first mortgage. The two most common types of second mortgages are home equity loans and home equity lines of credit (HELOC).

Can you get a HELOC with a 700 credit score? ›

In most cases, you'll need a credit score of at least 680 to qualify for a home equity loan, but many lenders prefer a credit score of 720 or more. Some lenders will approve a home equity loan or HELOC even if your FICO® Score falls below 680.

What is the average credit score needed for a HELOC? ›

HELOC requirements

You should expect to meet the following HELOC loan requirements: Minimum 620 credit score. You'll need a minimum 620 score, though the most competitive rates typically go to borrowers with 780 scores or higher. Debt-to-income (DTI) ratio under 43%.

Will my mortgage go up if I get a HELOC? ›

Home equity loans and HELOCs do not directly affect your mortgage payment. However, you'll owe additional monthly payments for both of these products. While the payment on your first mortgage will remain unchanged, the overall amount you must pay each month on your home will increase.

Does a HELOC change your rate? ›

Home Equity Lines of Credit (HELOCs) typically come with a variable interest rate, which means your re-payments will vary each month not only based on the amount of the loan you have used, but on the interest charged on your outstanding balance.

References

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Melvina Ondricka

Last Updated:

Views: 5889

Rating: 4.8 / 5 (68 voted)

Reviews: 91% of readers found this page helpful

Author information

Name: Melvina Ondricka

Birthday: 2000-12-23

Address: Suite 382 139 Shaniqua Locks, Paulaborough, UT 90498

Phone: +636383657021

Job: Dynamic Government Specialist

Hobby: Kite flying, Watching movies, Knitting, Model building, Reading, Wood carving, Paintball

Introduction: My name is Melvina Ondricka, I am a helpful, fancy, friendly, innocent, outstanding, courageous, thoughtful person who loves writing and wants to share my knowledge and understanding with you.