Took Out a HELOC Last Year? Suze Orman Has These Words of Warning
- Many people borrow money by tapping their home equity.
- While HELOCs have their benefits, yours could soon get more expensive.
You may want to pay off the sum you owe sooner rather than later.
There's a reason so many homeowners have borrowed money via a HELOC, or home equity line of credit, over the past year or so. Home values soared in 2021, making it easier for property owners to tap their home equity.
But if you took out a HELOC last year, you may want to get moving on paying it off quickly. The longer you wait, the more expensive it could get.
How HELOCs work
A HELOC differs from a traditional loan in that you don't necessarily borrow the full sum you're eligible for at once. Rather, with a HELOC, you get access to a line of credit you can draw from as needed within a specified time frame -- usually five to 10 years.
The upside of HELOCs is that they're very flexible. You might qualify for a $20,000 HELOC you take out for a home renovation project. But if the job only costs $15,000, you can leave your remaining $5,000 untouched. And that way, you won't have to pay interest on it.
But there's a downside to taking out a HELOC, and it's that the interest rate on the sum you borrow will generally be variable. That means your rate could climb over time, making your payments on that HELOC more expensive.
That's a situation a lot of borrowers might face in the near term. And so if you're able to pay down some or all of your HELOC, now's a good time to do it.
Get moving on that HELOC
Financial expert Suze Orman recently warned on her podcast that now's a bad time to owe money on a HELOC. Since HELOC interest rates reset frequently, and consumer borrowing rates are on the rise, your loan could get more expensive.
See, the Federal Reserve is in the process of raising interest rates in an effort to slow the pace of inflation and bring living costs down. The logic there is that if borrowing gets more expensive, consumers will start to cut back on spending, thereby narrowing the gap between supply and demand.
But because interest rates are going up, existing HELOCs could become more expensive, and soon. And so Orman says it's wise to pay yours down as much as you can. That could mean having to cut back on some expenses to free up that cash. But it's worth doing because it could save you a lot of money.
Be careful with credit card balances, too
It's not just HELOCs that come with variable interest rates. Many consumers owe money on their credit cards. If you're in that boat, work on chipping away at that debt, too, before your credit card interest rate rises and your balance becomes more expensive to pay off.
In fact, you may even want to prioritize your credit card over your HELOC, since the former may be costing you a lot more in interest. But if you're only looking at debt from a HELOC, then try to make paying it off a priority in the coming months.
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