HELOC Balances Rose $3 Billion Last Quarter. Here's Why That's a Dangerous Thing

Borrowing via a HELOC carries some risk.

Home values have been on the rise since mid-2020. And that's left a lot of homeowners with more equity to tap -- and more borrowing options.

The Federal Reserve Bank of New York reports that during the third quarter of 2022, home equity line of credit (HELOC) balances increased by $3 billion on a national level. That represents the second consecutive quarterly increase after years of declining HELOC balances.

Of course, it's easy to see why HELOC balances grew over the past few months. Homeowners are now sitting on higher levels of equity, so it makes sense that they'd opt to tap that equity rather than go through the motions of applying for a personal loan (and potentially risk getting denied).

Plus, HELOCs are very convenient. Unlike personal or home equity loans, HELOCs don't require you to borrow a lump sum of money all at once. Instead, with a HELOC, you get access to a line of credit you can access within a preset time period that can be pretty lengthy -- often, 10 years.

But while HELOCs might seem like a great borrowing option, they also have one major drawback. And that drawback could come back to haunt a lot of the people who just made the decision to take one out.

Grappling with variable interest

One of the things that makes credit card debt so tricky to manage is that credit card interest rates can climb while you're in the process of paying off a balance. Well, the same holds true for HELOCs.

Unlike personal and home equity loans, HELOCs generally come with variable interest rates attached to them. And that means that once you borrow from your HELOC, your monthly payments have the potential to climb over time.

Meanwhile, the Federal Reserve has been aggressively raising interest rates in an effort to slow the pace of inflation and give cash-strapped consumers some relief. And that's driving borrowing costs upward across a range of categories.

Consumers who take out fixed-rate loans are now looking at higher interest rates than they've faced in the past. But those who owe money on variable-rate products could find that their payments get harder and harder to keep up with as rates climb.

Be careful when taking out a HELOC

If you have a lot of equity in your home, you may decide that borrowing against it is an option worth pursuing. But in that case, you may want to consider a home equity loan over a HELOC so you get the option to lock in a fixed interest rate on the sum you borrow. That way, your monthly payments will be more predictable, and you might have a much easier time working them into your budget.

If you go that route, you'll need to borrow all of the money you need at once, as opposed to getting access to a line of credit you can tap for years. But what you lose in terms of flexibility, you might gain in the form of having a much easier time keeping up with your payments.