Here's What Happens When You Don't Tap Your HELOC

If you need to borrow money, there are different ways you can go about it. You could take out a personal loan, which allows you to borrow money for any purpose. But if you own a home, you may want to borrow against the equity you have in that property. You can do so via a home equity loan or home equity line of credit (HELOC).

The benefit of taking out a HELOC is that you aren't locked into borrowing a preset amount of money. Rather, you get access to a line of credit you can draw from at any time during a specified period -- commonly 10 years, but it could be more or less.

Also, with a HELOC, you don't have to actually borrow the entire sum you qualify for. You could take out a $30,000 HELOC to give yourself leeway to make improvements to your home. But if you only end up needing to borrow $20,000, you can leave the remaining $10,000 untouched. That way, you won't have to pay interest on it.

As of the first quarter of 2023, outstanding HELOC balances stood at $339 billion, according to the Federal Reserve Bank of New York. So clearly, they're a pretty popular borrowing option. But if you're going to take out a HELOC, you'll want to make sure you actually have a need for the money. If you open an HELOC you don't end up using, you could end up throwing some money away.

When you don't end up tapping your HELOC

It's common to take out a HELOC and not withdraw the amount you're eligible to borrow in its entirety. But if you don't borrow from your HELOC at all after putting it in place, there could be some penalties.

Some lenders require you to take minimum withdrawals from a HELOC. If you don't, you could be charged an inactivity fee. There can also be cancellation fees if you realize you don't need your HELOC and want to close it early.

The good news is that these fees should be disclosed to you as part of your HELOC contract. So there shouldn't be any surprises. But it is important to know what you're getting into.

You should also know that there can be application fees and closing costs for putting a HELOC in place. As such, you really don't want to open a HELOC just for the sake of having money to tap. You may be better off waiting until you have an actual need to borrow.

In fact, let's say you want to make sure you have access to $10,000 at all times in case a home repair pops up. You may be inclined to open a $10,000 HELOC. But not using it could cost you. So a better bet in that situation is to build a $10,000 emergency fund and keep that money in a savings account instead.

Be careful when signing a HELOC

A HELOC can be a convenient way to borrow, but there are drawbacks to taking one out. In addition to the costs you might face for putting one in place and for leaving yours untapped, falling behind on HELOC payments could eventually put you at risk of losing your home. So it's important to consider all of your borrowing options if you need access to money, and not just assume a HELOC is automatically your best bet.