When times are financially tough, homeowners often have a distinct advantage. They can tap into the equity they’ve built up in their homes through home equity lines of credit (HELOCs) and home equity loans.
While these options can help homeowners access much-needed funds for everything from home improvements to debt consolidation, it’s still important to approach HELOCs and home equity loans with a measure of caution.
How do you manage the risk?
A HELOC is a revolving line of credit that allows homeowners to borrow against their property’s equity, up to a predetermined limit. Homeowners only make payments on what they actually use. A home equity loan, in comparison, is a lump-sum loan that uses the home’s equity as collateral and comes with a fixed term of repayment.
Homeowners get into trouble with HELOCs and home equity loans usually because they overestimate their ability to repay the loans. With that in mind, even though the loans can be used for anything, you want to use them wisely. Some good reasons to take out a home equity loan or HELOC include:
- Paying off higher interest rates: The interest rate on a HELOC or home equity loan may be significantly lower than what you’re carrying on your credit cards or other loans. It may make a lot of sense to trade those debts for another, especially if doing so reduces your overall monthly expenses.
- Paying for home repairs or modifications: If you intend to pour the money into your home and raise its overall value, you may recoup the expense over time. HELOCs and home equity loans can also be used to modify a property for disability accommodations, which is another worthwhile expense (especially for homeowners hoping to age in place).
It’s far riskier to take out either of these loans to seed a business, pay for an adult child’s education or fund a dream vacation. A miscalculation in your plans or a sudden financial downturn can leave you unable to make your payments and force you into foreclosure.
If you already have a HELOC or a home equity loan and you’re in financial distress, it may be wise to seek immediate legal guidance.