2 Reasons I'd Steer Clear of HELOCs

by Christy Bieber | Published on Nov. 17, 2021

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I'm not willing to take on the risks HELOCs present.

Key points

  • Home equity lines of credit let you borrow against the equity in your home.
  • Your home is used as collateral for home equity loans.
  • Many HELOCs have variable interest rates.

A home equity line of credit (HELOC) is a financial tool that's used to tap the equity in a home. (And equity is the portion of your home you own outright.)

Unlike many other ways to borrow against your house, such as a cash-out refinance loan or a home equity loan, a HELOC doesn't just let you access a lump sum of cash up front. Instead, lenders extend you a line of credit with the upper limit based on the value of your home and any existing mortgages.

With a HELOC, you have the option to draw from your line of credit any time you'd like, borrowing up to the maximum permitted amount. It works like a credit card, as you then make payments based on your balance amount and can continue borrowing. This makes it useful to many people who prefer to have the option to borrow as needed.

Despite the benefits, though, I wouldn't consider taking out a HELOC. Here's why.

1. I don't want an open line of credit on my house

A home equity line of credit gives you the chance to borrow as much as you want, up to the maximum line of credit. But your home serves as collateral and guarantees any debt you take on. If you aren't able to make the minimum required payments borrowed on your credit line, the lender could take steps to foreclose on your home.

I don't think it's likely I'd become unable to make payments. But I also don't want to take a chance on putting my house in jeopardy -- especially because having an open line of credit available at a low interest rate could create an increased temptation to borrow money. I'd rather know my equity is safe in my home. Or, if I have to borrow against it, I would opt for a home equity loan. Then I'd know up front exactly how much equity I was putting at risk -- and what my monthly payments and borrowing costs would be over time.

2. Most HELOCs have a variable interest rate

Most of the time, home equity lines of credit come with variable interest rates. This isn't always the case, but it's definitely more common to find lenders offering variable rates than fixed ones. And I'm not a fan of variable-rate loans because I prefer certainty when it comes to borrowing.

With a variable-rate loan, the interest rate could rise on a HELOC and make total costs and monthly payments go higher. This increases the chance that the loan could become unaffordable, which is definitely not something you want to have happen when your home is on the line.

Because of the risk to my property and the potential surprise costs associated with a home equity line of credit, I've made the decision that this type of borrowing is not right for me. This doesn't necessarily mean it's the wrong choice for everyone, but if you're considering a HELOC, be sure to think about the possible downsides and explore alternatives before you put your equity at risk.

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