Homeowners whose property is worth more than what they owe have the option of using their equity to get a hold of more money. Home equity lines of credit can fund education expenses, home improvements or help you pay off debt with higher interest. The credit can be a lifesaver, but can also get users in trouble.
The Federal Reserve Board offers these warnings about HELOCs:
* Expect variable interest rates. Most HELOCs come with variable interest rates that can sneak up on you over the term, making you pay back more than you bargained for. You can try to get your bank to convert it to a fixed rate or a loan you pay back in installments.
* You’ll pay closing costs. Banks pile on ridiculous costs, such as application fees, appraisal fees and other filing costs.
* Interest-only options can choke you. Those who opt to pay back only the interest throughout the term of the HELOC will end up owing the entire principal at the end. If you must take out a HELOC, use only the money that you need and pay down the balance as quickly as you can.
What You Should Know About Home Equity Lines of Credit [The Federal Reserve Board]