Should I get a HELOC when I buy a home?
Recently, a client who was purchasing a new home told us that a friend had advised him to get a home equity line of credit (HELOC) when he bought the house, even if he didn’t need it. He wasn’t sure he fully understood the reasons his friend gave for doing this, and since it’s a question we’ve heard before, we decided to address it on the blog.
If you think you might need a HELOC in the future, it’s not a bad idea to go ahead and open it at the time you purchase the home, since there can be some advantages.
One possible advantage is that using a HELOC wisely can help your credit score. Since a HELOC is a revolving line of credit, it is listed on your credit report just like a credit card. If you don’t use it, it will decrease your utilization, and if it is with the same bank as your mortgage, it adds one more responsibly used credit account to your credit report.
It also may get you a better interest rate if you decide to refinance your home loans in the future. For instance, say you have a mortgage and a HELOC, and you decide you want to refinance to consolidate them and get a lower interest rate and a fixed monthly payment. If you got your HELOC when you bought the house, you will qualify for a lower interest rate when you refinance than you would otherwise. Refinancing a HELOC that was obtained after the home was purchased is considered a “cash-out refi,” which carries a higher interest rate.
One final advantage – one we don’t necessarily advocate – is having a HELOC in place in case of emergency. Just like any home loan, it takes time to open a HELOC. It’s better to have one in place before you need it than wait until a crisis arrives to apply for one.
Of course, all of this advice is only helpful if you can pay enough down on your house to have equity at the time of purchase.
Finally, we have one caveat for you: don't get a HELOC if you aren't disciplined about using credit. If you use it as a credit card and accumulate a lot of debt with it, the advantages vanish and it becomes more of a burden than a blessing.