Is It Smart to Take Out a Home Equity Line of Credit?

Do you want to take a vacation or make much needed repairs to your home? Do you have equity in your home? Then your financial worries may be easier to address than you thought. However, just because you can take out a home equity line of credit doesn’t mean you should. Take the time to learn more about this option before signing the papers.

What Is a Home Equity Line of Credit?

A home equity line of credit is similar to a credit line on a credit card. You are allowed to borrow up to a certain amount, based on how much you’ve paid into your home, on an as needed basis. While a credit card is unsecured debt, the money you borrow through a HELOC is collateralized against your home. In other words, if you fall behind on this loan, the bank can take your house.

What Are the Benefits?

There are many benefits in a home equity line of credit. First of all, it allows you more buying power than many traditional loans. Another benefit is that the interest paid on these loans is tax deductible. If need be, you can also choose to make interest only payments. A HELOC is also reported to the credit bureaus to help you improve your credit score.

What Are the Drawback?

Obviously the biggest drawback is that you’re putting your home on the line. Should you fail to make payments, you could lose your house. This cannot be stressed enough. Chances are you will also be required to pay an annual fee and the interest rate will vary, making the cost of monthly payment unpredictable. One last thing to consider is that should the value of your home decline, you could end up upside down due to the loan. This means that you wouldn’t be able to refinance the home.

Should You Take One?

A home equity line of credit is a great way to consolidate debt, pay unexpected expenses, and cover other large costs. However, it’s not without risk. A HELOC should only be obtained when absolutely necessary. This is not a line of credit you tap into in order to take a vacation. If you really do need the money, a HELOC can be easier to obtain than other loans, but you could lose your home. Borrow at your own risk.

The idea of borrowing money from the equity built up in your home is comforting when times get tough. However, this should always be a last resort. Carefully consider your options before putting your home on the line. If you’d like to learn more about home equity lines of credit, you can find more articles here.