Can You Open a HELOC and Not Use It?

Sometimes, people want to take out a HELOC without accessing the money right away. You may be considering this if you want to have money available for an emergency fund or unexpected expense. However, not all HELOCs work well for this purpose, and there may be fees to pay that aren't worth the cost if you don't plan to actually borrow.

Considerations for Opening a HELOC and Not Using It

A home equity line of credit allows you to tap into the equity in your home without affecting your current mortgage loan.

Some HELOCS offer a line of credit that you can access as needed. Others offer a lump sum, with the opportunity to redraw without applying for a new loan as you repay what you owe. Because you’ve already received loan proceeds, you’ll begin making principal and interest payments immediately.

You'll need to understand eligibility, fees, and how you access funds to decide if a HELOC is right for you.

When It Makes Sense

If you have enough equity to meet HELOC requirements and you're thinking about getting a HELOC with no plans to use it, here are a few examples of situations where that may make sense for you:

• You want a backup source of funds: Some HELOCs offer access to a line of credit but don't require you to borrow up front. It may be possible to use this type of HELOC as an emergency fund, so you're prepared for unexpected expenses.
• You're planning for future expenses: If you're hoping to remodel or make a big purchase in the future, applying for a HELOC in advance can be helpful. If you choose a HELOC that offers a lump sum up front and the ability to redraw funds later, you can use the initial advance to cover early project costs, and then redraw as you repay the balance and additional expenses arise.

When It May Not Make Sense

There are also times when getting a HELOC and not using it doesn't make good sense. Here are some examples of situations when you may not want to get a HELOC under these circumstances:

• You’re planning another major loan soon: If you are planning to take out a larger loan, the credit inquiry from the HELOC, and the resulting debt on your credit report could affect your ability to borrow.
• You don’t want to pay fees: HELOCs often have upfront and inactivity fees. You will need to check with your lender to see if you will be charged. If you'll pay a high fee to borrow for a loan you don't need immediately or don’t even know if you’ll end up needing, borrowing may not make sense.
• Your home’s value is decreasing: Some lenders put a credit freeze on the HELOC if the value of the home is declining. You would lose the benefit of being able to access the money when you need it under these circumstances.

What Happens if You Don’t Use Your HELOC?

Different types of HELOCs work differently.

HELOC with upfront lump sum: If you’ve already received the lump sum at closing, you’ll make scheduled principal and interest payments beginning with your first payment due date, even if the funds remain untouched in your bank account. Not spending the money does not eliminate your repayment obligation.

Traditional HELOC: If your HELOC doesn’t come with a lump sum up front, then you generally would not owe principal and interest because you have not borrowed any money, however you may still owe fees, depending on the lender. Additionally, you will still have an active financial account that affects your credit and borrowing abilities. Here is how this could affect your finances:

• It can affect your credit score: It is important to understand how a HELOC affects your credit. You will get a hard inquiry on your credit when you open a HELOC. Depending on whether you receive a lump sum upfront or not, your credit utilization ratio could change. Both factors affect your credit score.
• It may impact future borrowing options: If you've recieved any money from your HELOC, your debt-to-income ratio will be affected. Your ability to borrow could be adversely impacted as a result.
• Your lender may close inactive accounts: Some lenders will close unused lines of credit. Most will allow you to continue to borrow for the duration of the draw period, but you will need to find out your lender's policies. If your lender might close an unused account, there is little use in applying for it if you don't plan to use it.

Are There Fees for an Unused HELOC?

HELOCs, even unused ones, usually have fees depending on your lender's rules and procedures. Policies vary by lender, and fees should be disclosed up front. Here are some fees you may owe:

• Annual or maintenance fees: Some lenders charge an annual fee for a HELOC, with Experian reporting typical fees of $5 to $250.
• Inactivity or non-use fee: Some lenders may charge inactivity fees if you have a traditional HELOC open and do not draw from your line of credit. HELOCs hat provide an upfront lump sum generally wouldn’t be considered ‘unused’ because funds were dispersed at closing.
• Closing costs and upfront fees: Closing costs and fees on some HELOCs can range from 2% to 5% of the loan's value, according to Experian. However, many lenders offer no-fee HELOCs.
• Early closure fees: The Consumer Financial Protection Bureau warned that some HELOC lenders charge early closure fees or cancellation fees for terminating a HELOC early (typically within the first two or three years). Not all HELOCs come with these fees, and the timeline for when they are charged can vary.

Pros and Cons of Opening a HELOC You Don’t Use

There are advantages and disadvantages when you borrow against your home equity using a HELOC you don't use. The table below shows some of the biggest advantages.

Final Thoughts: Getting a HELOC Without an Initial Draw

Traditional HELOCs may let you establish a line of credit without borrowing until you need funds. Other HELOCs provide a lump-sum advance at closing and require principal and interest payments from the beginning of the loan, even if you don't immediately spend the money. Understanding how your specific HELOC works, including when funds are disbursed and when repayment begins, can help you determine whether it's the right financing option for your needs.

A mortgage loan professional at Freedom Mortgage can help you understand all your borrowing options so reach out today to see how we can help.