Can You Get a HELOC and Not Use It?
Understand the nuances of securing a Home Equity Line of Credit for future financial flexibility, even if you don't plan to draw funds right away.
A Home Equity Line of Credit (HELOC) represents a flexible financial instrument allowing homeowners to leverage their accumulated home equity. It offers access to funds as needed.
Understanding a Home Equity Line of Credit
A Home Equity Line of Credit functions as a revolving line of credit, similar to a credit card, but secured by a homeowner’s property equity. It allows individuals to borrow funds up to a predetermined limit, accessing money as needed rather than a single lump sum.
A HELOC has two primary phases: a draw period and a repayment period. The draw period, typically 5 to 10 years, allows homeowners to withdraw, repay, and re-borrow funds as needed. Interest is generally charged only on the amount borrowed. Following this, the repayment period, often extending for 10 to 20 years, commences, during which no new funds can be drawn, and the borrower must repay the outstanding principal and interest. Most HELOCs feature variable interest rates, meaning the rate can fluctuate based on market conditions, though some lenders offer options to convert portions to a fixed rate.
Costs and Fees of an Undrawn HELOC
Even when a HELOC remains unused, homeowners may still incur various costs and fees associated with its establishment and maintenance. Initial expenses can include closing costs, which typically range from 2% to 5% of the total credit limit. These costs may include appraisal fees (generally $300-$700) and application fees ($100-$500). Some lenders also charge an origination fee, often 0.5% to 1% of the loan amount, for processing and approving the application.
Beyond the upfront costs, ongoing fees can apply to an undrawn HELOC. Annual maintenance fees are common and typically fall within a $50 to $100 range, though they can sometimes be as high as $250. Some lenders implement inactivity fees, charged if no funds are drawn for a specified period, often $200 to $500. Homeowners should also be aware of potential early closure fees, which can range from $200 to $500 or even 2% to 5% of the outstanding balance, if the HELOC is terminated before a certain timeframe. Some lenders advertise “no closing costs” or “no annual fees,” but these offers might come with other conditions or higher interest rates.
Financial Considerations of an Undrawn HELOC
The presence of an undrawn HELOC can influence a homeowner’s financial standing in several ways, even without active borrowing. The application process typically involves a hard credit inquiry, which can result in a temporary, slight credit score decrease. While open, the HELOC’s available credit limit is reported to credit bureaus. Although FICO scores generally exclude HELOC utilization from credit utilization ratio calculations, some other scoring models, such as VantageScore, may consider it.
Maintaining a large, unused line of credit can also factor into a homeowner’s future borrowing capacity. Lenders assessing new loan applications, such such as for a mortgage, will consider the total available credit across all accounts, including an undrawn HELOC. This available credit could potentially influence the approval amount or terms for new financing. An undrawn HELOC typically does not directly impact debt-to-income (DTI) calculations as there are no active payments. However, some lenders might factor in the potential for future payments if the line were to be drawn upon, depending on their underwriting policies.
Strategic Establishment of a HELOC Without Immediate Use
Homeowners often strategically establish a HELOC without immediate intent to draw funds as a proactive financial planning measure. One common motivation is to create an accessible emergency fund. A HELOC can provide quick access to substantial cash at lower interest rates than unsecured personal loans or credit cards, serving as a financial safety net for unexpected expenses. This approach allows liquid savings to remain invested or available for other purposes, while the HELOC stands ready for unforeseen circumstances.
Another strategic reason is to prepare for future planned expenses that may arise intermittently or have an uncertain total cost. This includes anticipated home renovations, educational expenses, or other significant outlays that may not require immediate funding but will benefit from readily available capital. Securing the HELOC in advance locks in access to credit based on current home equity and financial standing, potentially before market conditions or personal circumstances change. This foresight can be particularly advantageous in anticipating interest rate fluctuations, allowing access to liquidity before rates potentially increase.