A Home Equity Line of Credit is an open-ended account similar to a credit card that you can borrow against and repay. The fact that HELOC loans are very similar to credit cards can be considered an advantage or a disadvantage depending on which side of the fence you’re on. If you are a person with spending habits that have proven to be dangerous in the past, you should consider these types of loans dangerous.
A HELOC is a credit line secured by your property, but you only borrow funds as needed.
In this line of credit, you can use and repay as much of the loan as you choose as many times as you like during the draw period. This allows you to only pay interest when you are using the money.
A primary advantage of using a HELOC to pay off debt is to cut the high-interest rates you’re being charged on that other debt. For example, if the average annual interest rate for HELOCs is 5% and if you use funds from that HELOC to pay off a $12,000 credit card balance with 19% annual interest, you’re significantly saving on interest charges.
HELOCs typically come with adjustable, not fixed interest rates, so if interest rates rise, the rate on the HELOC will rise, disrupting your budget. The adjustable rates come with caps on how much the rate may rise over the life of the loan, but these may not provide much protection if they’re high. All home equity lines of credit do have adjustable rates, but they seem to carry a much higher risk than that of a regular adjustable-rate loan. Changes in the mortgage market can affect HELOC rates very quickly. This is one of the disadvantages of HELOC, however, many banks offer an option to convert to a fixed rate.
The second disadvantage of a HELOC is an increase in your housing costs if you’re still paying off a first mortgage, plus the home equity line of credit each month.
If you use up your home equity cushion to consolidate debt, you are putting your home at risk hat definitely makes you vulnerable. If you do not manage to keep up with your monthly payments and you do not manage to reach an agreement with your lender, you will end up losing your home.