A HELOC—short for home equity line of credit—allows you to borrow money against the equity in your home.
With the flexibility to borrow and repay money based on your financial circumstances, it’s something that many people in need of money turn to.
While there is no shortage of HELOC benefits, don’t get so caught up that you overlook the many risks associated with it. These included but are not limited to:
1. Losing Your Home
There is no bigger risk than this one. When you opt for a HELOC, you’re putting your home in the direct line of fire.
Should you default on your loan, the lender has the legal right to repossess your property—and that’s not something you want to take lightly.
Even if the bank limits the amount of money you can borrow against your home’s equity, you’re still taking a risk.
Before you do anything, create a plan for paying off your home equity line of credit as outlined in the terms and conditions.
2. Your Lender is in Charge
With a loan, you get all your money at once. But with a HELOC, you borrow money as you need it, much in the same manner as a credit card.
Here’s the problem: your lender could freeze or reduce your line of credit at any time.
The primary reason this would happen is a missed payment. However, it could also come into play if financial markets take a steep downturn or your home’s equity plummets.
If you’re relying on your HELOC, such as to pay for a home improvement project, the last thing you need is to find that you no longer have access.
3. Variable Interest Rate
The interest rate associated with a home equity line of credit is usually variable, meaning that it can and probably will change.
It’s your hopes that the rate decreases during the time you’re using your HELOC, but there’s no guaranteed. It could increase, which would result in higher payments.
Tip: talk to your lender about how the calculate your HELOC’s interest rate.
Final Thoughts on HELOC Risks
With the above risks in mind, it’s your turn. As you compare the pros and cons of securing a HELOC, you’ll come to better understand if it’s right for you and your financial future.
Don’t waste time making a decision. Do your own homework and talk to your lender about your concerns. That’ll help you decide what comes next.
Have you ever taken out a HELOC in the past? Were you happy with the decision? Did you eventually regret going down this path?