Home equity lines of credit have declined for more than a decade. But HELOCs should make a turnaround in 2022 as mortgage rates rise to their highest levels since 2019.

A home equity line of credit lets you borrow against your home's equity. You can draw from it periodically and repay some or all of it, like a credit card. People often use a HELOC's flexibility to pay for home renovations.

Whatever happened to HELOCs?

HELOCs had their heyday during the housing boom. Homeowners had 24.2 million HELOC accounts in the first quarter of 2008, according to the Federal Reserve's quarterly household debt and credit report. Eventually, the amount owed on HELOC balances crested at $710 billion.

Skip to the third quarter of 2021, the latest data, and it appears that HELOCs have gone the way of the landline. The number of accounts (12.8 million) fell by nearly half, and balances ($320 billion) showed a similar decline.

The slow and steady demise of HELOCs began during the housing bust, as previously inflated home values fell nationwide and lenders shunned risk of any kind. My wife and I saw it firsthand. In June 2009, the bank barred us from drawing any more on the HELOC we’d had open for half a dozen years, giving the reasoning "the value of your home has further declined." My incensed wife stamped into the bank branch with a check to pay off the balance and shutter the account.

As home values recovered in the decade following the housing bust, homeowners accumulated trillions of dollars of equity. Available equity reached $9.4 trillion in the third quarter of 2021, according to Black Knight, a mortgage-tech and data company. Yet HELOCs haven't made a comeback — yet.

Later homeownership, lower mortgage rates

I wonder if equity lines faded in part because banks deemphasized them as a new generation — millennials — started buying. If you bought your first home in the last few years, you might not know anyone who has a HELOC. Or maybe your parents had a discouraging experience with a HELOC, as I did. If you're not exposed to ads about HELOCs, none of your friends has one, or your parents bad-mouthed them, you would be unlikely to get one.

Cynthia Montgomery, corporate communications director for Truist Bank, doesn't buy my theory that millennials disdain HELOCs. She says millennials are buying homes later in life than previous generations. "This delay of homeownership has reduced the pool of homeowners who may have considered HELOC for borrowing needs," she said via email.

In addition, low mortgage rates have shoved equity lines into the background. Record-low mortgage rates "prompted many consumers to choose a mortgage refinance instead of a home equity loan," said Matthew Vernon, retail lending executive for Bank of America, in an email.

Why HELOCs might bounce back

Vernon is talking about cash-out refinancing — a different way of extracting equity. While a HELOC is a second mortgage that's towed behind your original one, a cash-out refi drives alone. It replaces your original mortgage with a loan for more than you currently owe. You receive the difference in cash.

Cash-out refinances have surged in the pandemic era, when the average rate on the 30-year fixed-rate mortgage has mostly remained under 3.5%. But mortgage rates are expected to rise in 2022, potentially approaching 4% toward the end of the year. The last time the 30-year fixed was consistently above 4% was at the end of 2019.

If your mortgage's rate is under 3.5%, you'll be reluctant to get a cash-out refinance as rates approach and exceed 4%. You're likely to prefer a HELOC instead. A HELOC allows you to keep the low interest rate on your primary mortgage while converting equity into cash. Rising mortgage rates are the reason I believe HELOCs will become relevant again in 2022.

What could hold HELOCs back

A resurgence of HELOCs isn't a sure thing. HELOC interest rates are variable, not fixed. They're tied to the prime rate, which will go up every time the Federal Reserve raises the federal funds rate. HELOC rates could rise up to a full percentage point this year. The prospect of rising interest rates could make some homeowners wary of equity lines.

Another potential obstacle: Shortages of building materials and skilled workers could force postponements of home renovations, thus delaying the need to borrow.

Deciding between a HELOC and cash-out refi

You can compare a HELOC with a cash-out refinance once you have two pieces of information:

  • How much money you need for renovations (or whatever you intend to spend it on).

  • How much you currently owe on your mortgage.

Combine the numbers and use a mortgage refinance calculator to figure the monthly payments at current interest rates. That's your estimated monthly cost for a cash-out refinance.

To estimate the minimum monthly payments on a HELOC, go to the interest-only mortgage calculator and enter the total amount you intend to borrow in the top box, and a $0 down payment in the next box. A typical HELOC has a 10-year interest-only loan term and a 20-year fully amortizing loan term. Rate averages are available on the current HELOC rates page.

Combine the estimated HELOC payment with your current mortgage payment. Compare that with the estimated cash-out refinance payment.

As mortgage rates continue to go up this year, the scales increasingly will tip toward HELOCs and away from cash-out refinances. We will see a revival of HELOCs. Even among millennials.