Using a HELOC for medical expenses

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For many Americans, covering the cost of healthcare is a struggle. Medical debt stands at $140 billion, making it the number one source of debt collections in the U.S. Of those who had medical debt, the average amount in collections came to $2,424 last year.

If you have some equity in your home, one potential solution to keep your medical bills in check is to use a home equity line of credit (HELOC) for medical expenses.

How does a HELOC work?

A HELOC allows homeowners to borrow against the equity in their home. HELOCs are a revolving form of credit, much like a credit card, giving homeowners greater flexibility around both borrowing and repaying funds.

Most lenders require at least 15 percent to 20 percent equity in your home, and your credit limit with a HELOC depends on several factors, including your credit and outstanding debts, the market value of your home and the amount that you owe on your mortgage. Once approved, you are given a credit limit up to 85 percent of the appraised value of your home, minus outstanding mortgage balances.

Depending on your lender, there may be a minimum or maximum withdrawal requirement after your account is opened. Your lender may also offer access to those funds in a variety of ways, including through an online transfer, writing a check or using a credit card connected to your account.

A HELOC also has two phases: the draw period and the repayment period. During the determined draw period, which is typically 10 years, you may withdraw money from your account to be used as you see fit. Your lender may require you to make small interest-only payments.

After the draw period, you can ask for an extension. Otherwise, the HELOC enters the repayment period, during which you’ll no longer be able to access funds. Principal-plus-interest payments usually have a 20-year period.

Pros and cons of using a HELOC for medical expenses

A HELOC might sound like the best solution for medical expenses, but you should consider the pros and cons carefully before you make a decision.

Pros

  • You borrow only what you need. Like a credit card, you only spend what you need, plus interest. During the draw period, you can withdraw funds to pay for medical expenses as you need them.
  • You may qualify for a low interest rate. You can take advantage of the historically low interest rates by using a HELOC for medical expenses. HELOCs can also have lower interest rates compared to credit cards. You may be able to get a HELOC with an interest rate under 5 percent, while the average APR on a credit card is around 16 percent.
  • Flexible repayment options. The timeline for your HELOC can vary depending on the amount you borrow and your lender, but the total time can last up to 30 years. During the first 10 years, you may only be required to make small payments towards your interest with the option to put down more towards the principal. The extra money you put down during the draw period is still available to you.
  • There are few restrictions. Although the HELOC is secured by your home, you can use it just like a credit card or a personal loan to pay for medical expenses or debt.
  • Pay interest compounded only on the amount you draw. A HELOC is an interest-only product where the borrower pays interest for a specified amount of time before repaying the principal.

Cons

  • You could lose your home. A HELOC is a secured loan, meaning you could lose your home if you don’t make timely payments. Defaulting on your HELOC could lead to foreclosure, depending on your lender and how much equity you hold in your home.
  • It’s still debt. Using a HELOC for medical expenses is still replacing debt with more debt. You worked hard and most likely spent years building equity in your home and when you have to pay the HELOC back, you’ll be making mortgage and HELOC payments at the same time. Another potential problem is that if housing prices drop, you could owe more on your home than it’s worth.
  • Your lender may require a balloon payment. Your HELOC could also come with a balloon payment. This is a large lump-sum payment of the outstanding balance that some lenders may require at the end of the loan’s term. Generally, a balloon payment is more than twice the loan’s average monthly payment, and often it can be tens of thousands of dollars.
  • You may not be able to refinance if you haven’t repaid your HELOC. Once you take out a HELOC for medical expenses, you may have to get approval from your HELOC lender to refinance your mortgage loan, which your lender may refuse. If your HELOC lender refuses to let you refinance, you may need to pay off the HELOC first.
  • You’ll have a variable interest rate. HELOCs usually come with variable interest rates, meaning your interest rate on the outstanding balance can fluctuate based on the federal funds rate. If you take out a HELOC for medical expenses with a low variable interest rate, there’s a chance you could pay more in the future.

If you’re interested in getting one, consider using a HELOC calculator to get an idea of what to expect.

Most expensive common medical expenses

Medical debt is a rising cost in the United States. By 2020, Americans had more medical debt in collections than any other category of debt. Because medical needs can come up unexpectedly and can be expensive, many people do not have the funds to immediately cover medical expenses. If insurance does not cover the costs, people can find themselves suddenly in debt.

Even common injuries or medical expenses can be expensive:

  • Cataract removal: $2,300 to $3,000
  • C-section: $13,000
  • Joint replacement: $16,500 to $33,000
  • Broken bone repair: $8,000
  • Angioplasty and atherectomy: $20,000
  • Stent procedure: $18,000
  • Hysterectomy: $13,000
  • Gallbladder Removal: $24,000 to $32,000
  • Heart bypass surgery: $40,000

More expensive procedures, like a heart bypass or heart valve replacement, can be in the hundreds of thousands of dollars.

How to avoid medical debt

You may be able to save on your medical bills besides using a home equity line of credit. Here are a few ways to avoid medical debt:

  • Comparison shop. Even if you have health insurance, you can still comparison shop for a healthcare provider. If you have a preferred provider option (PPO) health insurance plan, your insurer will pay for most of the medical costs when you use a doctor or hospital that is part of the insurance company’s preferred network of providers.
  • Review your medical bills. You can ask for an itemized bill to know specifically what you are being charged for. Make sure you received every medication and service listed, and make note of any discrepancy or potential error.
  • Negotiate with your doctor’s office. It doesn’t hurt to negotiate with the billing department of the hospital or doctor’s office. If a medical bill is too high, getting a discount may be easier than you think.
  • Create a payment plan. Ask the billing office to be put on a payment plan. More often than not, staff may be able to work with you to create a plan with manageable payments.
  • Review your health coverage. Go over your health insurance policy to see what’s covered and what isn’t. All covered expenses should be paid for by your provider.
  • Establish a health savings account. You can open a health savings account, or HSA, to save tax-free money to pay out-of-pocket medical expenses.
  • Claim tax deductions for medical expenses. If your unreimbursed, out-of-pocket medical bills exceeded 7.5 percent of your adjusted gross income, you may be able to deduct medical expenses from your taxes.

The bottom line

A HELOC for medical expenses may be worth looking into if you want access to funds on your own schedule with flexible repayment options. However, it’s important to weigh all of your options when repaying medical debt and consider potential risks when taking out a loan or a line of credit.

Terms and conditions of HELOCs vary by lender, so be sure that you understand the lender’s repayment terms and don’t be afraid to shop around before making a commitment.