A HELOC — also known as a home equity line of credit — is a great way to borrow money by using your home as collateral.
Of course, just the same as any type of loan or financial product, it’s critical that you understand what you’re getting and why it’s the right solution for you.
Here are some of the many questions to answer before getting a HELOC:
- What are you going to use the money for?
- Is a HELOC the right choice, or would you be better off with a home equity loan?
- Do you qualify for a HELOC?
- Are you comfortable with the idea of using your home as collateral?
- Do you have a lender in mind?
- What are the fees associated with securing a HELOC?
- Do you have plans to use all the money at once or slowly draw from the balance, as you would with a credit card?
- How much can you borrow? How much do you really need?
- How do you pay back a home equity line of credit?
- Are there any potential drawbacks of a HELOC?
All of these questions are designed to help you decide in favor of or against a HELOC. Since no two people are in the same financial situation, you must answer these questions for yourself.
One of the most important things you can do is consider both the pros and cons of a HELOC. It’s easy to get so caught up in the idea that you overlook the fact that it may not be the right product for you at the present time.
Here are some situations in which it makes sense to avoid a HELOC:
- You worry about your ability to make your minimum payment: If there’s any uncertainty, you’re best off putting a HELOC off for the time being.
- Unstable income: For example, if your industry is going through a time of instability, taking on another payment is not in your best interest.
- Upfront costs: Before you do anything, make sure you’re comfortable with the upfront costs of a HELOC. You may soon realize that you’re not willing to pay these expenses for what you’ll get in return.
- Concerns about an interest rate increase: Home equity lines of credit have adjustable rates. So, while your rate could go down — resulting in a lower minimum monthly payment — it could also move in the other direction.
As long as you answer these questions before getting a HELOC, you’ll feel good about the decision you make.
There are hundreds upon hundreds of lenders offering home equity lines of credit, so keep an open mind. This will help you get exactly what you want from a lender you trust.