December 02, 2021 at 4:54pm | BBHST Admin
Homeowners have all sorts of advantages available to them such as building credit and tax breaks. By paying your mortgage every month, you also have the benefit of building your equity up until you ultimately own the full amount of value on your home. It’s probably the biggest difference between buying and renting a home - owning your property. Today, we’re focusing on home equity lines of credit (HELOC) and the pros and cons of using it.

What is a HELOC?

A HELOC uses a portion of your home equity to provide a revolving line of credit. You can use this to pay off larger expensive or high-interest debt. 313,744 of these loans originated in the third quarter of 2018, showing that it’s uncommon but still being used in real estate. A HELOC typically has a low interest rate which may even be tax deductible. Your home is used as collateral on the credit line. Borrow up to 85% of the value of your home subtracted by what you owe. A HELOC is like a credit card and it’s a good tool in case of an emergency when you really need money in a crunch.

Pros and Cons of a HELOC

Before you consider using a HELOC, you should know when it’s a good idea to use it. While home ownership is possibly the largest asset that you have, using equity lines is a big deal. We carved out the pros and cons of using a HELOC so you know what you’re getting into.

The Pros
No Closing Costs
As long as you have solid credit, you won’t have to worry about closing costs to set up a HELOC. No hassle with application fees or appraisal expenses. If you choose the regular home equity route, then these are usually associated with fees. However, a HELOC is different from that.

Fees
While a HELOC is similarly structured like a credit card, you won’t pay extra for taking out cash in advance like a credit card does. Most lenders won’t charge additional fees when you use a HELOC.

Reduced Interest Rates
Using your home as collateral is a pretty secure investment for a lender. It’s enough to offer you a low interest rate compared to an unsecured credit card or personal loan. Even though rates could rise over time, there’s a maximum limit on how much they could go up.

Flexibility
A HELOC is flexible enough to create a favorable pay-back situation with different options available. Options such as locking in a fixed rate so you don’t have to worry about fluctuations. You also have time to pay off the HELOC when you’re comfortable to do so. Whether you want to take your time or pay it off early is up to you.

The Cons
Rate Fluctuations
HELOCs may start out with a pretty low interest rate and it’s adjustable. However, it’s always going to depend on if interest rates are moving in general. It’s something that you have to keep an eye on at all times. If you don’t pay attention, you’ll be shelling out more money when it’s time to pay the HELOC back. Of course, you could convert your adjustable rate into a fixed rate. But the fixed rate will likely be a higher rate than your adjustable one, in case they start trending upwards in the future.

Using Your Home as Collateral
Your mortgage is already a big deal. Using your home as collateral means that you’re putting it on the line. With many life uncertainties, this isn’t a loan that you could ignore. The HELOC is also going to prolong the time it takes to pay off your mortgage. No money is really going towards the principal amount of your mortgage. It should only be used for essentials like paying for education or doing renovations that add value to your home. 

Losing Home Value
Just like interest rates, your home value moves up and down too. You're taking out equity equal to a portion of the value of your home. This means potential market crashes could put you at risk if you use a HELOC. It’s complicated especially if you planned on selling the house to cover your loan. Every homeowner has a different financial situation. That’s why you should consider if your situation makes sense at the potential risk of losing home value.

Loan Attractiveness
Many loans have circumstances that definitely make us think twice before taking one. A HELOC has lots of temptation because of its attractiveness. So attractive that you might take advantage of a HELOC even if you don’t really need it. While it may seem like a beneficial idea, plenty of homeowners forget about the risks. 

It’s easy to take a cash advance and not spend the money on something important. Households in 2019 remained hesitant to tap into the equity in their homes, because of uncertainties. If a HELOC is used irresponsibility, it causes mortgage complications down the line and you’re taking on more risk.

Being a Smart Homeowner
Once you’re a homeowner, you have lots of responsibility and advantages at your disposal. It’s important to know what the perks of being a homeowner are to create a better financial situation for yourself. One of the perks is using a HELOC which works similar to a credit card. By using a HELOC, you have to evaluate your current situation and understand if it’s the right choice for you. Be a smart homeowner by taking the necessary risks and using it to your advantage more than anything!

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