HELOC Balances Rose by $14 Billion in Q4 of 2022, Representing Largest Increase in Over a Decade

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That’s not really a good thing, though. 

Americans certainly aren’t strangers to borrowing money. You’ll commonly see consumers whip out their credit cards and charge up a storm, figuring they’ll pay off those balances over time.

Similarly, U.S. homeowners aren’t necessarily shy about tapping the equity they have in their homes. And last year, homeowners had a lot of that equity to tap due to elevated home values. It’s not so surprising, then, to learn that balances on home equity lines of credits, or HELOCs, increased by $14 billion during the fourth quarter of 2022, according to the Federal Reserve Bank of New York.

Not only does that represent the third consecutive quarterly increase in HELOC balances, but it’s the largest increase in more than a decade. And all told, Americans owe $336 billion on their HELOCs.

It’s easy to see why a HELOC might be an easy and convenient way to borrow money when you need it. But you should also know that there’s a danger in carrying a HELOC balance, and it may come back to bite you this year in particular.

Your debt could get more expensive over time

Some types of loans come with fixed interest rates, like home equity and personal loans. But HELOCs, like credit cards, commonly come with variable interest.

What this means is that the interest rate on your HELOC could change with market conditions. And if that interest rate rises, guess what? So will your monthly payments.

Meanwhile, there’s a good chance the cost of consumer borrowing will increase on a whole in the course of 2023. The Federal Reserve is on a mission to slow the pace of inflation. To make that happen, the central bank is likely to raise interest rates multiple times in 2023 just like it did in 2022.

The Fed doesn’t set consumer borrowing rates directly. But when it raises its federal funds rate, which is what banks charge each other for short-term borrowing, the cost of consumer borrowing tends to rise, too. So what might happen this year if you owe money on a HELOC is that your interest rate on that debt goes up, leaving you with higher payments to grapple with.

Be careful when taking out a HELOC

Borrowing via a HELOC can be tempting when you have a fair amount of equity in your home to tap. But before you move forward with a HELOC, you may want to consider opting for a home equity loan instead. A home equity loan will give you the benefit of a fixed interest rate on your debt — and predictable monthly payments until it’s paid off.

Meanwhile, if you’re paying off a HELOC now, you may want to try to whittle down your balance before interest rates climb again. Granted, inflation may be making it hard to eke out extra money these days, so that may not be possible. But if you can chip away at your balance, you might really appreciate it if the rate on your HELOC starts to soar.

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