How financial institutions can seize the opportunities presented by HELOCs

Home equity lines of credit (HELOCs) have become increasingly popular in the US, especially in the mid-2020s. Originally introduced in the 1970s, their resurgence is largely due to the significant rise in homeowners’ equity, which now totals around $35 billion, averaging approximately $320,000 per home.

Borrowing against home equity offers an attractive alternative to taking out a second mortgage or additional home refinance loan. Interest rates for HELOCs tend to be lower, and the process of securing finance is quicker since lenders already have access to much of the information they need to finalize the deal.

Additional benefits of HELOCs include a positive impact on equity. Home improvements funded by HELOCs can significantly boost property values, further increasing equity levels. For instance, estimates¹ show that replacing a garage door can recoup as much as 194% of the original investment when the home is sold. Moreover, if a HELOC is used primarily for home improvements, the interest costs may be tax-deductible.

HELOCs also function as a form of revolving credit, allowing homeowners to use funds for home improvement projects such as a new kitchen, extension, or roof. Once the loan is paid down, the credit line can be accessed again for any additional works as needed. HELOCs are also popular for other purposes, including paying for education, consolidating debt, starting a new business, or buying a vacation home.

Borrowers should be advised to avoid using HELOCs as a checking account, or a source of funds for everyday spending. This is particularly important for those with lower incomes, as missing monthly payments could result in their HELOC being frozen or reduced.

One of the few drawbacks of a HELOC is that its interest rates are variable, unlike the fixed rates associated with home loans. Both banks and borrowers need to consider this when assessing affordability.

Despite the variable interest rates, HELOC rates are significantly lower than those typically charged on other revolving finance instruments used for large purchases, such as credit cards. As of early 2025, HELOC interest rates had fallen to around 8.0%, a notable drop from just over 10% at the start of 2024.

The incentives for banks to offer HELOCs as part of their product set

HELOCs are poised to drive mortgage lending growth in 2025, as more homeowners prefer to stay put and improve their properties rather than move. This trend is largely driven by recent hikes in mortgage interest rates.

Homeowners who purchased their homes when interest rates were low are now more reluctant to sign up for new, more expensive deals, hoping that rates will decrease at some point in the near future.

As a result, banks that do not offer HELOCs to their customers could miss out on lucrative business opportunities, which are expected to grow significantly in 2025 and beyond. Additionally, competition among HELOC providers is likely to intensify as the preference for HELOCs over other lending products continues to rise.

What will HELOC customers want to see from their banks?

HELOC customers, like those applying for any mortgage product, will expect their provider to make the application and funding process as fast and efficient as possible. They will also need access to clear information about the advantages and disadvantages of a HELOC compared to a straightforward home loan.

To support lenders in meeting these expectations, Finastra offers Mortgagebot. Mortgagebot is an end-to-end platform that covers the entire mortgage lending process, from application and origination to processing and document preparation.

This market-leading, fully-digital solution accelerates time to close by integrating banks’ point of sale (POS) application channel with their loan origination system (LOS), which handles processing, closing, and managing mortgage applications.

Mortgagebot is far from a one-size-fits-all system. It offers fully-configurable application paths that align with each bank’s unique underwriting and credit reference policies. Finastra’s rules-based mortgage loan underwriting engine, Power Approve, enables banks to deliver instant approvals to customers.

Mortgagebot is designed with an intuitive user experience, making it easy for customers to submit relevant documents when needed. Real-time loan status messaging keeps customers fully updated throughout the process.

While HELOCs provide an attractive alternative method of securing finance for homeowners, it is crucial for banks to apply the same risk controls on borrowing as they do for any other instrument. With Mortgagebot, banks can achieve that objective while providing a fast and competitive service that meets the needs of their customers.

¹https://www.jlconline.com/cost-vs-value/2024/