As home values rebound, more people are taking out home equity lines of credit, also known as HELOCs. With these loans, you can use the money for anything you want, say renovating your home or covering the cost of a child's wedding.

You also don't have to use the loan right away. The money is simply available should you need it. You can access it anytime within a “draw” period that typically lasts up to 10 years. After that, any outstanding balance (principal and interest) must be paid back over a period that is typically 10 to 20 years.

That's often more appealing to homeowners than a traditional home equity loan, where you receive a lump sum when the loan is taken out and have to start paying back the loan with interest immediately.

Last year, according to CoreLogic, a data and analytics firm specializing in real estate, homeowners took out home equity lines of credit that amounted to $100 billion—the highest level since 2008. And in the first quarter of this year, the number of people taking out home equity lines of credit rose 10 percent, according to RealtyTrac, which compiles housing data.

But there are risks.

“Tapping into your home equity can be useful,” says Scott Moffitt, a  financial adviser at Summit Financial Group in Loveland, Ohio. “But you need to be smart in how you handle it.” 

If you tap into your home equity line of credit and then fail to pay the loan back, the lender may be able to force you to sell your home to satisfy the debt.

What to Consider

If you plan to take out a home equity line of credit, keep these suggestions in mind:

Borrow modestly. Lenders today typically want the combined balance of a mortgage and a home equity line to be no more than 80 percent of the home’s value. That's a far more cautious approach than during the housing bubble when you could get a home equity line of credit without any equity, on the faulty premise that home values would keep rising.

But as housing prices rise, Moffitt says some lenders are now allowing qualified borrowers to have combined balances as high as 90 percent. Moffitt says that can be risky and advises clients to keep their combined borrowing to no more than 70 percent of a home’s value. “That way if you get a modest 5 percent to 10 percent decline in housing prices you still have enough equity to meet the bank requirements,” he says.

Use your home equity line for unexpected expenses. Peter Lang, a wealth manager and tax professional in Fort Mill, S.C., says one of the best uses of a home equity line of credit is as a backup to your emergency savings.

“I’d rather see you use money from a HELOC to cover an unexpected, large expense, than make a larger withdrawal from a retirement account,” he says.

There’s no tax on withdrawals, and in most instances the interest is tax deductible. That’s a lot better than withdrawing a large amount from a traditional retirement plan, where you'll owe income tax and may have to pay a 10 percent early withdrawal penalty as well.

Keep an eye on the rate. Home equity lines of credit are variable rate loans. The average rate according to, a publisher of mortgage and consumer loan data, is about 5.5 percent. That’s more than a half a percent lower than the typical fixed-rate home equity loan. Given that interest rates remain near their historic lows, it’s not surprising that borrowers prefer home equity lines of credit to fixed-rate home equity loans, according to CoreLogic.

If the Federal Reserve continues to raise short-term rates, though, repaying a home equity line of credit will become more expensive.

“If you don’t have the ability to repay a HELOC quickly over six months to a year if rates rise, then you should be thinking about using a fixed-rate home equity loan instead,” says Moffitt. That’s especially true if you anticipate tapping your home equity to pay for an expense that will continue for several years, such as college tuition.

Keep looking for the best deal. If you’ve got a lot of home equity, the lender that provides you with your current mortgage may pepper you with offers for a home equity line of credit. You have no obligation to stick with that lender. Be sure to check out credit unions; they typically offer lower interest rates than banks. For example, PenFed Credit Union, based in Alexandria, Va., and Truity Credit Union in Bartlesville, Okla., both offer HELOCs with rates as low as 3.75 percent.