Don’t Use a HELOC in These 3 Situations

Three situations in which you shouldn’t open a HELOC and take on the risk.

Have you ever considered taking out a home equity line of credit (HELOC)? It can be a little trickier than the traditional way of getting a loan, but it has its benefits. Time defines the term well when it says: “A HELOC is a line of credit secured by your home that you can use for anything. It works similarly to a credit card in that you can continuously tap into the line of credit, up to the credit limit, during the draw period.” With how much home prices rose in the last couple of years, a lot of homeowners’ equity has grown exponentially. If that’s you, then you might be considering a HELOC more now than ever. 

As I said, there are benefits to this route. However, there are some big drawbacks that many people don’t consider, so I want to highlight those today. You shouldn’t use a HELOC if… 

1. …you aren’t sure you can make the payments. Since this is secured by your home, if you don’t make your payments, you risk losing your home. A lot of people don’t think this is worth that big of a risk. Make sure that if you commit to a HELOC, you feel very confident you can handle the payments.

If you’re worried about uncertainty or temptation, a HELOC might not be your best route.

2. …interest rates are on the rise or uncertain. Rates aren’t locked with a HELOC like they are with a traditional loan, so if interest rates rise, so will your regular payments. Again, you risk not being able to make your payments and then losing your home. Unfortunately, this risk is extremely likely at this time because rates are rising, and the future of interest is very uncertain. 

3. …you don’t like uncertainty or think you might be tempted. You have to know yourself. If you don’t like uncertainty and want to be able to know how much your monthly payments will always be, then a HELOC is not the way to go. Also, a HELOC can be used to purchase anything, so you need to have self-control. It’s like a credit card—you need to be able to stop yourself instead of feeling like you have all the money in the world. If you’re worried about falling into this temptation, a HELOC might not be your best route. 

There are some significant downfalls and risks that come with a HELOC. Make sure you evaluate which route is best for you and your specific situation, and don’t be afraid to consult an expert. If you have any questions, call or email me anytime. I would love to help you choose what’s right for you.