2 reasons why I would avoid HELOCs
A Home Equity Line of Credit (HELOC) is a financial tool used to tap equity in a home. (And equity is the part of your home that you own in full.)
Unlike many other ways to borrow against your home, like a cash refinance loan or home equity loan, a HELOC doesn’t just give you access to a lump sum cash up front. Instead, lenders give you a line of credit with an upper limit based on the value of your home and any existing mortgage.
With a HELOC, you have the flexibility to withdraw from your line of credit at any time, borrowing up to the maximum authorized amount. It works like a credit card because you then make payments based on your balance amount and can continue to borrow. This makes it useful for many people who prefer to have the flexibility to borrow as needed.
Despite the benefits, I would not consider purchasing a HELOC. Here’s why.
1. I don’t want an open line of credit on my home
A home equity line of credit gives you the flexibility to borrow as much as you want, up to your maximum line of credit. But your home serves as collateral and secures any debt you incur. If you are unable to make the required minimum payments borrowed from your line of credit, the lender may take action to foreclose on your home.
I don’t think it’s likely that I will become unable to make payments. But I also don’t want to take the risk of putting my home in jeopardy – especially because having an open line of credit available at a low interest rate could create an increased temptation to borrow money. I prefer to know that my equity is safe in my house. Or, if I have to borrow against it, I would go for a home equity loan. Then I would know in advance exactly how much equity I was putting at risk – and what my monthly payments and borrowing costs would be over time.
2. Most HELOCs have a variable interest rate
Most of the time, home equity lines of credit have variable interest rates. This is not always the case, but it is certainly more common to find lenders offering variable rates than fixed rates. And I’m not a fan of variable rate loans because I prefer certainty when it comes to borrowing.
With a variable rate loan, the interest rate could increase on a HELOC and increase total costs and monthly payments. This increases the risk of the loan becoming unaffordable, which is definitely not something you want to see happen when your home is in jeopardy.
Due to the risk to my property and the potential surprise costs associated with a home equity line of credit, I decided that this type of loan was not for me. This doesn’t necessarily mean it’s not the right choice for everyone, but if you are considering a HELOC, be sure to think about the possible downsides and explore alternatives before putting your capital at risk.