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Tapping home equity by putting a HELOC in place might seem like a solid move. Read on to see why it’s a decision you might regret.
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You have different options you can explore when you need to borrow money. But if you have equity in your home, you may be tempted by a home equity line of credit, or HELOC.
A big reason consumers tend to be drawn to HELOCs is that they’re flexible. You can lock in a HELOC and get many years to tap it and pay it off. And if you have a lot of equity in your home, combined with good credit, then a HELOC may end up being fairly easy to qualify for.
In 2022, U.S. HELOC balances rose to almost $306 billion, reports Experian. That’s up 3.5% from 2021.
Given that homeowners today are sitting on $30 trillion in home equity, that increase in HELOC activity makes sense. But before you sign a HELOC, consider these drawbacks.
1. You could face early termination fees
You get a certain amount of time to pay back the money you borrow via a HELOC. But some lenders might charge an early termination fee if you pay off that line of credit ahead of schedule.
This isn’t guaranteed to happen, but it could. So before you sign a HELOC, read the fine print and see what fee, if any, you’ll be subject to for getting ahead of it. You can also try shopping around for lenders that don’t impose this sort of fee.
2. You could be charged a fee for not tapping your HELOC
The beauty of a HELOC is that you get the leeway to tap a portion of that line of credit or leave it alone completely. If you’re approved for a $50,000 HELOC but you only end up needing to borrow $45,000, you don’t have to withdraw the remaining $5,000 and rack up interest on it.
But if you don’t end up tapping your HELOC at all, you may be charged a fee by virtue of having less of a need to borrow money. So while you could end up saving on interest, some of that savings might be wiped out by a fee.
3. Your HELOC payments may be unpredictable
When you take out a home equity loan, you lock in a fixed interest rate on that debt, which means your monthly payments stay the same unless you refinance that loan. With a HELOC, the interest rate on your debt can be variable, which means your payments under that HELOC can change over time and become more costly.
Of course, falling behind on a HELOC could have serious consequences. It could, at the very least, damage your credit. And in a more extreme situation, it could result in the loss of your home. So you may want to stick to an installment loan, like a personal loan or home equity loan, instead. That way, you’ll know exactly what monthly payments you’re signing up for from the start.
A HELOC might seem like a convenient way to borrow. And for some people, it makes sense. But be aware of these pitfalls before you sign a HELOC, so you don’t end up regretting your decision to do so.
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