Home / Top News / 3 key things to know before opening a home equity line of credit

3 key things to know before opening a home equity line of credit

HELOC use rose as cash-out refis dropped

Real estate remain's a sellers' market, says Realtor.com's Danielle Hale

“In a low-rate environment, people were looking at cash-out refis,” Bellas said. “Now … a lot of people have a mortgage with a very low rate, so to do a cash-out refi, they’d be paying [a higher rate] on their full mortgage.”

“We’ve had quite a few people over the past 12 months … elect to go with the HELOC because of that,” Bellas said.

How HELOCs compare with other borrowing options

I would not use a HELOC to buy frivolous things or things you can’t afford.

David Demming

President of Demming Financial Services

However, like your mortgage, a HELOC is a lien against your house — meaning that if you don’t repay as promised, the lender would have the right to foreclose on your house.

“I would not use a HELOC to buy frivolous things or things you can’t afford,” said certified financial planner David Demming, president of Demming Financial Services in Aurora, Ohio.

“It should be a short-term bill that you’re going to pay off within a finite period of time,” Demming said.

Here are three key things to consider before signing on the dotted line.

1. Variable interest rates make it tricky to budget

2. It may be difficult to pay off the principal

HELOCs typically only come with monthly interest payments — meaning none of your minimum payment goes toward the principal.

“If you don’t have a lot of excess funds and are making interest-only payments, it can be difficult to find the cash and discipline to pay down that balance,” Bellas said.

“I’ve seen people with a $50,000 balance and five years later it’s still close to that [amount],” he said.

HELOCs generally have a “draw” period when you can take money out that often lasts 10 years and then a repayment period of, say, 10 or 20 years, when you start paying both interest and principal. And because of that, your payments will jump if you have only been paying interest.

For instance, a $50,000 balance would yield interest-only payments of $312.50 and then jump to $593.51 during a repayment period of 10 years, according to InvestorsBank.com’s HELOC calculator.

If your HELOC has a balance when you sell the home, it must be paid off along with the primary mortgage on the house.

3. Beware of transferring debt to a HELOC

Sometimes, homeowners turn to a HELOC to pay off higher-interest debt, such as credit card balances.

On the face of it, shifting high-rate balances to a HELOC could make sense. However, if you don’t have a plan to pay off the HELOC, you’re just delaying the inevitable, Bellas said.

“The danger is really that you’re recategorizing the debt and kicking it down the road,” Bellas said. “There’s probably a bigger thing that needs to be addressed.”

About admin

Check Also

How yelling at kids affects their happiness, success

Almost every parent yells at their child eventually, no matter how hard they try to …