January 4, 2023

What You Should Know Before Getting a Home Equity Line of Credit (HELOC)


Are you thinking of getting a HELOC?


Easy access to funds might sound appealing and a home equity line of credit is a quick way to secure funds. However, there are certain risks associated with a HELOC that can leave you with a lot of debt, payments you cannot afford and too much stress to mention.

In this article, we take a look at what you need to know about a home equity line of credit and reasons why you might want to rethink getting a HELOC.

HELOC: What is a Home Equity Line of Credit?

HELOCs enable home owners to use their property as equity to secure low-cost funds. These funds are made available over a specified period and you can usually withdraw using a credit card, check or online transfer. With this in mind, a HELOC is a revolving source of funds and sometimes compared to a credit card. They usually feature a variable rate of interest and unlike home equity loans, most lenders do not require any closing costs upon origination.

In case you might be asking yourself, a home equity loan is not the same thing as a home equity line of credit. The first of these is usually needed for a one-time expense such as a home extension or maybe a wedding. Unlike HELOCs, the amount set for repayments on a home equity loan is known to the homeowner from the very beginning of the contract.

How Exactly Does a HELOC Work?

There are typically two phases to a home equity line of credit. The first is known as the ”draw period” and this is a time during which you can access the credit. Interest-only payments are required during this first phase but home owners also have the option of paying more toward the principal amount.

When the draw period is over, often 10 years later, it’s sometimes possible to request a loan extension. In phase two, you begin making regular payments plus interest until the remaining balance of the loan is cleared. During this time, you are no longer able to access funds and the repayment period usually lasts for 20 years. And it’s easy to see why people are drawn to getting a HELOC..

You can use a HELOC to borrow funds without having to pay interest on the unused funds. Low rates of interest can also seem like an attractive proposition and the availability of extra funds is most often the primary motivation. For instance, some folk use a HELOC to provide relief during times of economic uncertainty, while others use these funds as a back-up for unforeseen costs or unexpected events such as job loss or redundancy.

Sounds like a great idea, right? Well, not necessarily.

Why You Need to Be Careful with a HELOC

The truth is, a HELOC can seem like a very attractive option for homeowners to raise some much needed equity. They can provide you with easy access to thousands of dollars and no real restrictions in terms of withdrawals. However, you need to be careful with a HELOC because such easy access to money increases the likelihood that you use these funds unintentionally. That is to say, you might spend the money on things you really ought not to be buying.

Here we take a look at three more reasons to think carefully about a HELOC.

  1.           Variable Interest Rates Affect Your Repayments

Variable interest rates are usually established by a lender based on the federal funds rate. Your monthly repayments increase when this rate goes up and there’s no way to predict when or if this might happen. This often happens and it means you might not be able to afford your future monthly repayments

  1.           It’s Difficult to Pay Back a HELOC

It’s not easy to pay back a HELOC. This task is complicated by the fact that it’s harder to budget for future payments when you do not know what these payments will be. This is always the case with a HELOC because as mentioned above, your monthly payments change significantly whenever there is a move in the interest rates.

  1.           Things Change But Repayments Need to Be Paid

HELOCS can leave you with a lot of debt. It’s true, interest only payments are often easy to meet during the initial phase of a HELOC. However, this quickly changes when you need to start paying off the actual balance. A homeowners financial situation can also change during this time which sometimes means they cannot afford the bigger payments during the repayment phase. Either way, the balance of a HELOC will put you in a lot of debt.

But what should you do if you can’t pay back your HELOC?

What to Do If You Can’t Pay Your HELOC Back

Nobody wants to end up with debt they cannot afford to pay and especially when there is a risk of losing your home to foreclosure. However, lenders are usually open to discussing an alternative arrangement and this can involve modifying aspects of the terms such as the interest rate or loan duration.

We also understand that not being able to repay a HELOC can feel like a very stressful ordeal. However, working with a credit attorney can help you navigate this difficult time and come to a suitable arrangement that will help you take back control of your finances. Ready to talk?

Get in touch with one of our team today to discuss your situation.

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