Why You May Want to Avoid a HELOC in 2023

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  • HELOCs give you more flexibility as a borrower than lump sum loans.
  • They also come with interest rates that could rise over time.
  • HELOCs are riskier as we head into 2023, because interest rates are already up across the board and could keep rising. 

It's largely a matter of interest rate risk.

If you have home repairs you've been putting off or a renovation you're really eager to tackle, then you may be thinking about taking out a home equity line of credit, or HELOC, in 2023. 

HELOCs actually have a number of benefits. First, if you have enough equity in your home, they can be fairly easy to qualify for -- even if you don't have the best credit score. 

Also, HELOCs are flexible. With a home equity or personal loan, you have to commit to a single sum to borrow. With a HELOC, you get access to a line of credit you can draw from over what could be a lengthy period of time. 

If you're borrowing for something like home repairs or renovations and you're unsure of your total costs, a HELOC could take some of the stress off your plate. You could, for example, apply for a $20,000 HELOC and only borrow $12,000 if that's all you need to complete the work at hand. If you don't touch the remaining $8,000, you won't have to pay it back.

But while HELOCs have their advantages, they come with one major drawback. And that drawback could be especially problematic in 2023 due to our current interest rate environment.

You could get stuck with payments that are hard to afford

Although a HELOC is a flexible way to borrow, it's still a loan, which means you're taking on monthly payments. The problem, though, is that those payments have the potential to get more expensive over time.

Unlike home equity and personal loans, which come with fixed interest rates, HELOCs come with variable interest rates. That means the rate you start out paying isn't guaranteed to be the rate you keep paying. 

Rather, your HELOC's rate could rise over time, making your payments harder and harder to keep up with. And if you fall behind on HELOC payments, the consequences could actually be quite severe.

First of all, any time you're late with a loan payment, it has the potential to cause a lot of damage to your credit score. But also, HELOCs are secured by the equity in your home, so if you fall far enough behind, your lender could force the sale of your home to get repaid. That would clearly be catastrophic.

Meanwhile, right now, consumer borrowing rates are up across the board due to recent rate hikes on the part of the Federal Reserve. So it's a tricky time to be signing any type of loan. But it's an especially tricky time to be borrowing money without locking in a fixed interest rate in the process. 

Be careful with HELOCs in 2023

Because home values are still up quite a bit on a national scale, many homeowners will likely be able to qualify for a home equity loan or HELOC in 2023. But if you have a need for money, you may want to favor the former over the latter. 

While a home equity loan will force you to commit to a single lump sum to borrow, you won't have to worry about your loan payments rising. And at a time when it's so expensive to take out a loan in the first place, that's important.

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