Home equity lines of credit (HELOCs) have been having a moment, with balances skyrocketing to $387 billion between mid-2023 and 2024 as homeowners look for budget-friendly ways to cash in on their home equity.
And while HELOCs can be a savvy way to fund home improvements or pay down high-interest debt, using them recklessly—like splurging on luxury vacations or risky investments—can leave you in a financial mess. With your house on the line, it’s important to understand the risks before turning your home into a personal ATM.
Why HELOCs Can Be A Risky Loan Option
A HELOC allows you to borrow against the equity you’ve built in your home, which can feel like an easy windfall—but don’t be fooled; it’s far from free money.
Taking out a HELOC means you’re actually taking on more debt, and if you can’t pay it back, you risk losing your home.
These lines of credit often come with a hidden wildcard: variable interest rates. While your payments might start out manageable, they can balloon quickly if rates climb, leaving you scrambling to cover the difference. And while we’re in a falling rate environment, that can change anytime, as history has shown.
“The biggest risk is rising interest rates, which can push payments higher than expected,” warns Becky Conner-McDuffy, senior loan officer at Penny Lane Financial. “Over-borrowing is another pitfall—it can leave you underwater if property values decline. Always leave yourself a financial cushion to avoid overextending your resources.”
So while a HELOC can be useful for smart investments—like fixing up your home—it’s not something to use casually, like buying the latest gadgets or funding a fancy vacation.
Experts remain divided on the best use of a HELOC. Some advocate leveraging this flexible lending tool for strategic investments, such as property purchases, higher education, or medical expenses. Others caution against putting your primary home at risk, favoring alternative financial solutions that avoid using your home as collateral, such credit cards and some personal loans.
However, there is broad consensus on what not to do—here are three ways most experts agree you shouldn’t use a HELOC:
Worst Ways to Use a HELOC
1. Covering Everyday Expenses
If you’re already struggling to keep up with monthly bills, adding more debt to the mix is like trying to put out a fire with gasoline. Instead, consider reaching out to your lender to explore options like mortgage forbearance or a loan modification.
These programs are designed for moments like this—when a temporary financial hardship has you feeling cornered. Lenders know the score and are often willing to work with you to keep your payments on track and help you avoid falling deeper into trouble.
2. Don’t Risk Your Home For Things That Lose Value
Using your home equity to finance a new car or luxury furniture might seem tempting, but it’s a risky move with little financial logic. These items depreciate rapidly—cars lose value the moment they leave the lot, and furniture rarely retains worth over time.
Meanwhile, the debt remains tied to your most significant asset: your home. If you’re unable to keep up with payments, you risk jeopardizing your house for purchases that offer no long-term return. Home equity is a powerful financial tool, but it’s best reserved for investments that build value, not fleeting luxuries.
Similarly, funding your lifestyle, such as shopping, eating out and traveling, is also a recipe for disaster, says Conner-McDuffy.
“These uses don’t offer any return on investment and could leave you paying for short-term indulgences over many years. It’s always better to reserve HELOCs for strategic financial moves.”
3. Betting the House on a Startup
If you’re thinking about using a HELOC to fund your small business, pump the brakes—there are better options tailored to entrepreneurs. Small businesses often face high failure rates, and funding them with a HELOC puts your home at risk if things go south.
According to Harvard Business Review, more than two-thirds of startups fail or never show a positive return on investment. Those are not great odds, especially when your home is on the line.
Explore safer options like small business loans or grants—your entrepreneurial dreams shouldn’t jeopardize your family’s security.
SBA loans, backed by the Small Business Administration, often offer lower interest rates and flexible terms, especially for businesses that struggle to get traditional financing. A business line of credit works like a HELOC but is specifically designed for business needs, letting you borrow as needed with secured or unsecured options.
Business credit cards can help manage expenses and earn rewards, but watch out for steep interest rates if you don’t pay them off monthly.
Bottom Line
A HELOC can be a financial lifeline, but it’s not without risks. Using it for lifestyle upgrades or unsecured debts might feel tempting, but it turns your home into collateral. Miss a payment, and your biggest asset could be on the line.
Before borrowing, make sure you have a solid repayment plan and avoid overextending your finances. A HELOC is best reserved for strategic moves—like boosting your home’s value or managing emergency expenses—not for splurges or covering bad habits. Treat it wisely, because when it comes to your home, the stakes couldn’t be higher.