Should you consider adding a HELOC when buying a home?

So you are purchasing a home, have a significant down payment, a great mortgage term and wonder if you should get a Home Equity Line of Credit (HELOC) proactively during the purchase. 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.

With all the positives keep in mind a few potential negatives and pay attention to the HELOC terms.  Some HELCOs require you to take out a certain amount for several months in the beginning, to have something outstanding annually or come with penalties if you close it out early.  Finally, 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.

-Marshall Rathmell