Why a HELOC Could Be 'the Last Thing You Would Ever Want to Do,' According to Suze Orman

If you own your home, and it's been looking a little dated lately, you might be in the market for some renovations. And you have options when it comes to paying for the costs involved. You might put the expenses on a credit card, or apply for a personal loan. Or, you could tap your home equity via a home equity line of credit, or HELOC.

What's a HELOC?

A HELOC is a loan you take out against the money you've already paid into your home (also known as home equity). The lender will give you a line of credit of a set amount that you can tap over a certain period of time (say, 20 years). You would then make payments to repay the amount borrowed. Once that period of time is up, you'll no longer have access to the credit line.

This all sounds pretty convenient, right? And unlike a home equity loan (which also has you borrowing against your home, except for a set amount all at once), HELOCs are flexible. Just because you get access to a line of credit totaling, say, $50,000, it doesn't mean you have to use that full amount at once, or ever. However, as financial guru Suze Orman pointed out on a recent episode of her podcast Women & Money, right now isn't the best time to get a HELOC -- and it's also not a great time for home renovations.

Suze Orman on how to pay for a home remodel

Orman addressed the topic of HELOCs because one of her callers asked about using one to remodel her home at a cost of $15,000-$20,000. The caller disclosed that she also had other sources of money (including a savings account, a few Roth retirement accounts, and holdings in mutual funds), but was also paying off credit card debt. Orman ultimately advised waiting to remodel because of the outstanding debt, but noted that if the caller was going to do it, she should use money in savings or a Roth account.

Regarding a HELOC specifically, Orman said, "The last thing you would ever want to do is a home equity line of credit." This is for a few reasons. First of all, Orman pointed out that an estimated cost of $15,000-$20,000 is likely too low; the prices on everything, including construction materials and labor, are up across the board right now. And regarding HELOCs specifically, they have one potential problem.

The trouble with HELOCs

Unlike a home equity loan or a personal loan, which come with fixed interest rates and fixed payment timetables, a HELOC has a variable interest rate, like a credit card. This means the rate you're paying has the potential to rise over time. And we are in a higher interest rate environment right now, thanks to ongoing problems with inflation and the Federal Reserve's rate hikes in response to it.

Those rate hikes will impact HELOC borrowers by making debt more expensive to carry due to those higher interest rates. And if you're struggling to make payments on your HELOC and fall behind, you could be at risk of losing your house, which acts as collateral for the loan.

Should you even pursue home renovations at all?

Ultimately, right now is likely not a good time to undertake an expensive home remodeling project if it's not absolutely necessary and if you have to borrow money to make it happen. Economists are still warning about a potential recession later this year, and if you're laid off, the last thing you'll want is to be struggling to manage HELOC or other loan payments alongside your regular bills.

It's certainly disappointing, but maybe there are some lower-cost moves you can make to improve your home in the meantime. This way, you can give yourself the chance to save up some money for that new kitchen or bathroom, and avoid the financial stress of paying off a HELOC balance with an interest rate that keeps rising.