{"id":10761,"date":"2025-02-25T19:43:34","date_gmt":"2025-02-25T19:43:34","guid":{"rendered":"https:\/\/finderica.com\/?p=10761"},"modified":"2025-02-25T19:43:34","modified_gmt":"2025-02-25T19:43:34","slug":"is-a-heloc-a-good-idea-heres-what-to-consider","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=10761","title":{"rendered":"Is a HELOC a Good Idea? Here\u2019s What to Consider"},"content":{"rendered":"\n
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Our homes are our biggest asset, and in a cash crunch they could provide some much-needed relief. A home equity line of credit, aka a HELOC, can put money in your pocket.<\/p>\n

A HELOC is a second mortgage that allows you to borrow against the equity in your home up to a certain amount based on the home\u2019s value and how much you still owe on the primary mortgage.<\/p>\n

A variety of lenders issue home equity lines and each bank has different criteria, fees and payback options. Here are some basic facts about these loans to help you decide if a HELOC is a good idea.<\/p>\n

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Reasons to Take Out a Home Equity Line of Credit<\/h2>\n

The main purpose of a HELOC is to use the money to increase the value of your home.<\/p>\n

\u201cIdeally you\u2019re supposed to use it to remodel your house, so it\u2019s the ability to go in and buy a home, borrow against that home, and remodel it and make it yours,\u201d says Mary Bell Carlson, a CFP and AFC, known as the Chief Financial Mom<\/span><\/a>. \u201cNow they get used for everything under the sun.\u201d<\/p>\n

Carlson says many people are using HELOCs to pay off high-interest credit card debt. The rates on most equity lines are much lower than on most credit cards after introductory offers. But it\u2019s important to keep in mind that during the terms of the loans, the rates on HELOCs often adjust and can increase.<\/p>\n

But she has a warning: \u201cWhen you take money out (of equity) and borrow it for any reason \u2014 whether it\u2019s for actually redoing your home or whether it\u2019s for paying off credit card debt or for an emergency fund during a time of crisis \u2014 you are now taking an unsecured debt and you\u2019re now securing it.\u201d<\/p>\n

That means if you don\u2019t pay, your home is at risk of foreclosure.<\/p>\n

\u201cIf you don\u2019t pay your equity lender, they can absolutely come and take your house,\u201d she said. \u201cThere\u2019s actually teeth to their bite, where with (debt collectors) they\u2019re just annoying.\u201d<\/p>\n

Getting a Home Equity Line of Credit<\/h2>\n

Even with the risk, a lower interest loan against the equity of your home can be a way to get through a financial crisis.<\/p>\n

The amount you can borrow depends on the current value of your home, how much you owe on your current mortgage, your debt to income ratio, your credit score\u00a0and other criteria, depending on the lender.<\/p>\n

But just because you have been paying on a mortgage doesn\u2019t necessarily mean you have built equity. Equity is the difference between what your home is worth and what you owe. It builds over time as you pay down your mortgage.<\/p>\n

\u201cIf you\u2019re someone who put zero or 1% or 2% down and just purchased your home recently, you don\u2019t have the ability to borrow against it,\u201d Carlson says. An interest-only loan could also mean a lack of equity because you have not been paying down the principal, just the interest, she added.<\/p>\n

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Is a HELOC a Good Idea?<\/h2>\n

Carlson has some advice for those wondering if a HELOC is a good idea.<\/span><\/p>\n

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  • Consider the fees and costs:<\/b> Most likely, you will need an appraisal to determine your home\u2019s current value and you might also need a title search. Those cost money, and there are also extra fees banks charge.<\/li>\n
  • Shop around: <\/b>You don\u2019t have to use the company that holds your first mortgage for the HELOC. Different banks offer different rates, so do your homework and find the best one.<\/li>\n
  • Know your debt-to-income ratio:<\/b> Take a look at your net income and make sure you will have the money to pay both mortgages and enough left over for living expenses.<\/li>\n
  • Longevity:<\/b> Think about how long you plan to stay in your house. The money from a HELOC needs to be paid back before selling the home, so if you plan to move in the near future, it might not make sense to borrow against the equity.<\/li>\n<\/ul>\n

    \u201cHome equity lines of credit can be a very low cost borrowing alternative, if needed,\u201d Carlson says. \u201cSo if you don\u2019t have savings or reserve funds and are in need during this economic downturn and crisis, it can be a suitable borrowing technique.\u201d<\/p>\n

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