Understanding HELOCs – Part 1

Are you considering a HELOC?

A  Home Equity Line of Credit is a line of credit using equity in your home as collateral. High-interest rates and inflation are drawing homeowners to HELOCS. The rates are usually more favorable than other forms of consumer debt, especially credit cards. A home equity loan pays a lump sum at a set interest rate, whereas a HELOC allows funds to be taken as needed. This keeps monthly payments lower and helps avoid unnecessary debt. Some nominal costs are involved, and interest is only charged on what’s borrowed. Typically, the rate is variable, with a payout period from 10 to 20 years. To qualify, you’ll need verifiable income, good credit, and considerable equity. Reliable payment history may be investigated. Bankrate.com provides current HELOC rates. Learn the vocabulary and read all the fine print.

Now the best use of this loan is to increase your property value. The risk is that the home is used as collateral. Paying off high-interest credit card debt can also be a good use. However, to avoid accumulating high-cost debt again, you have to reduce the use of credit cards and faithfully pay off the balance every single month. If repayments of a HELOC are missed, you face the danger of foreclosure. So, borrowers must be disciplined to live within a budget and have a payback plan. Remember, “The rich rules over the poor, and the borrower is the slave of the lender.” So only use a HELOC with care!

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