More Than 400,000 Borrowers Took Out a HELOC During Q3 2022. Read This if You Were One of Them

There's risk in carrying a HELOC balance you need to know about.

When you need to borrow money, you generally have choices. You could run up a tab on your credit cards, but that could end up costing you a boatload of interest. You could also turn to a personal loan, but you'll generally need pretty good credit to snag a competitive interest rate on one.

If you own a home you have equity in, you may have the option to borrow against it, whether via a home equity loan or line of credit (HELOC). HELOCs offer the advantage of being more flexible than home equity loans, simply because you're not locked into borrowing a fixed amount.

Rather, with a HELOC, you get access to a line of credit you can draw from during a preset period of time. It may be five years, 10 years, or longer. If you take out a $20,000 HELOC but only need to borrow $10,000, you won't have to pay interest on the remaining $10,000 you don't touch. But you might also have the option to borrow that remaining $10,000 in a few years should that need arise.

Meanwhile, more than 405,000 borrowers turned to HELOCs during the third quarter of 2022, according to newly published data by TransUnion. But while HELOCs may be convenient, you could run into financial trouble in the course of paying yours off.

Your HELOC could end up costing you more than expected

It's true that HELOCs give you a lot of flexibility in borrowing. But one major drawback associated with HELOCs is that their interest rates are generally variable, not fixed. And this means that the interest rate on your HELOC has the potential to climb over time.

In fact, you may have heard on the news that the Federal Reserve hiked up interest rates a lot in 2022. The Fed doesn't set HELOC rates, or any consumer borrowing rates, for that matter. But when it raises its benchmark interest rate, the cost of consumer borrowing tends to rise across the board. So in the near term, you may find that the rate on your HELOC goes up.

That's why now may be a good time to look at accelerating your HELOC payoff. If you're able to get yourself onto a strict budget and cut back on some expenses, you might manage to pay off your HELOC sooner than expected, thereby saving yourself money on interest. In fact, the sooner you pay off your HELOC, the less interest you're apt to accrue -- regardless of whether rates continue to rise or not.

Don't tap that HELOC more than you need to

Aside from the potential for your interest rate to rise, another drawback of HELOCs is you may be tempted to tap yours if the money is available to you. But that's not necessarily a savvy choice.

Let's say you want to go on vacation but don't have money saved for one. If you still have $5,000 to tap via your HELOC, you may decide to access that money rather than skip out on a trip you want to take. But you really shouldn't be borrowing money to fund things like a vacation, so if you haven't completely drawn down your HELOC, pledge to only tap it for true emergencies, like needing to repair your car or fix your roof.

It's not surprising to see that HELOC originations rose a lot last year. But if you took one out, do your part to manage it well and try to get it paid off as quickly as possible.