What Happens If You Don’t Use Your HELOC?

A Home Equity Line of Credit (HELOC) functions as a revolving credit line, allowing homeowners to borrow against the available equity in their property. Unlike a traditional loan that disburses a lump sum, a HELOC offers flexibility, enabling borrowers to draw funds as needed over a specified period. The amount of equity available for a HELOC is typically calculated as the difference between a home’s appraised value and the outstanding mortgage balance.

Understanding HELOC Fees When Not Drawn Upon

Many lenders charge an annual fee for maintaining the HELOC account. These annual fees commonly range from $50 to $100, though some lenders may offer HELOCs without them.

Some HELOC agreements also include inactivity fees, assessed if the line of credit remains unused for a specified period, often 12 months or more. These fees can typically range from $200 to $500. Additionally, if a HELOC is closed prematurely, lenders may impose an early cancellation or termination fee to recoup their initial setup costs. These charges are outlined in the HELOC contract, so review the terms carefully.

Credit Score Implications of an Unused HELOC

The presence of a large, available credit line generally contributes positively to one’s credit mix, demonstrating the ability to manage different types of credit accounts. The length of credit history associated with the HELOC also plays a role, as older accounts tend to benefit credit scores.

While FICO scores typically exclude HELOCs from credit utilization ratio calculations, some other scoring models, such as VantageScore, may consider the available credit. If the HELOC is reported to credit bureaus, its limit and payment history can factor into the score. However, if a lender closes an unused HELOC due to inactivity, it could reduce the total available credit, which might affect the credit utilization ratio in some models, particularly if it was a significant portion of overall credit.

Lender Actions Regarding Inactive HELOCs

Lenders retain rights to monitor and potentially modify or terminate a Home Equity Line of Credit, even if it remains unused. These actions are typically specified within the HELOC agreement signed by the borrower. Prolonged inactivity on the line of credit can sometimes trigger a review by the lender.

Significant changes in the home’s value, such as depreciation, or a decline in the borrower’s creditworthiness can also prompt lender intervention. Lenders may choose to reduce the credit limit, freeze the line of credit to prevent further draws, or even close the account entirely. This serves to mitigate the lender’s risk if the collateral’s value diminishes or the borrower’s financial stability changes.

The HELOC’s Lifecycle When Unused

A Home Equity Line of Credit is structured with distinct phases that progress regardless of whether funds are drawn. The first phase is the draw period, during which the borrower can access funds up to the approved credit limit. This period typically lasts for 10 years, though it can vary from 3 to 15 years depending on the lender.

During the draw period, if no funds are borrowed, no interest accrues and no monthly payments are required. Once the draw period concludes, the HELOC transitions into the repayment period, which commonly spans 10 to 20 years. For an unused HELOC, when the draw period ends, the account will close out as there is no outstanding balance to repay.