Not-So-Fun Facts About Home Equity Lines Of Credit

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]

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  1. Coffee says:

    Which begs the question, are there any fun facts about home equity lines of credit?

  2. Nigerian prince looking for business partner says:

    I’ve never understood the logic of using secured credit when unsecured credit is available for a similar interest rate. The ramifications of falling behind on a 2nd mortgage or HELOC are much more severe than a credit card.

    • Glaurung_quena says:

      Rates on credit cards and home equity LOC may be similar in your neck of the woods, but here in Ontario, the best credit card rate available to us is 12%, vs around 4% for a HELOC.

      • fatediesel says:

        I agree, my HELOC is much lower than any unsecured loan I could find (and I looked around a lot), and in addition the interest on a HELOC is tax-deductible.

        • Nigerian prince looking for business partner says:

          I imagine a lot of it depends on ones exact situation.

          For me, I’d rather pay slightly more as insurance against financial issues cropping up. I also don’t pay enough in interest to justify itemizing my taxes, so that really doesn’t help me. And with closing costs, some of the savings in interest goes away.

          When it comes down to it, I like to minimize debt in general, especially debt that has severe ramifications for non-payment, like mortgages. I like the idea of maintaining equity, in case something very bad happens down the line. I know many people who were using their houses like credit cards, paying down vast sums of unsecured debt with second mortgages, HELOCS, and refinances. It all fell apart when property values started to fall. YMMV.

    • Hi_Hello says:

      hmmm my mom is looking for some chuck of unsecured credit. She was going to go with the home equity lines of credit. I’m glad she was turn down… not sure why….since she told me they said her credit score suck, even though the letter they sent put her in the good credit score group…. one below the best credit score group…

      You know how she can borrow 60G ??

    • Rachacha says:

      I think it depends on the purpose and amount you are looking to borrow and for what purpose. We had a HELOC that we used to finance an addition to our home. We paid it off with no problem, however financing an 80,000 purchase on credit cards would have been difficult. Many years later we used the same HELOC to finance the purchase of land for our dream home ( banks were not issuing loans for undeveloped property, and we used this to get the property at a discount as we were the only ones in 8 months to approach the seller with cash in hand so he jumped). HELOCs also do not have a negative effect on your credit score which when shopping for a mortgage is important.

      • Nigerian prince looking for business partner says:

        For that kind of money, what was the advantage of a HELOC over just getting a second mortgage or rolling into into a refinance, with a fixed interest rate?

        To be honest, I’ve never worked with that kind of money. My mortgage wasn’t even $80,000.

        • Rachacha says:

          the HELOC was cheaper. Lower interest rates and lower closing costs and once we paid it off we still had the line of credit that we could tap into in case of an emergency. We never used it to finance things we could not afford and never for anything not related to our house

          • Nigerian prince looking for business partner says:

            Very good point. I actually had no idea HELOCs were used to finance such large undertakings. The majority of people I know, as well as the marketing pushed by the banks, seem to push the idea of a HELOC being a credit card backed by one’s property.

      • crispyduck13 says:

        Between you and RxDude I just learned a whole pile of useful stuff, thank you!

    • RxDude says:

      Interest on the HELOC is likely to be tax deductible. Interest on credit cards, bank loans, and vehicle loans is not. For an individual that makes more than $75k per year, student loan interest is not deductible. For a lot of people, it makes sense to put the debt on the house where there is a deduction.

      • Cor Aquilonis says:

        My understanding is that HELOC interest is only deductible if used for the purposes of upgrading/repairing/buying the home. It’s not deductible if used just to refi personal spending. Most people take the deduction anyway because they don’t know the rules or don’t care.

  3. homehome says:

    I know some home equity lines you don’t have to pay closing costs, so I guess it depends on the creditor.

    • fatediesel says:

      I got a HELOC at Wells Fargo that didn’t have any costs. I had only been in my home a year and my area didn’t have wild price swings so they were satisfied with my appraisal from when I bought my house and didn’t make me get a new one.

    • Hoss says:

      The closing costs are in the rate

  4. sir_eccles says:

    The HELOC can also cause all sorts of problems when it comes to a short sale. We bought our house in a short sale, the main lender was fine with the deal but the holder of the HELOC got really pissy when he realized he was about to get stiffed.

  5. CreditSense-CreditRecovery says:

    HELOCs are Credit Score killers! Most people don’t take into account that running up a HELOC is just like getting a credit card and maxing it out, just for $50,000 instead of $10,000 or $5,000. Carrying large balances on HELOCs will complete skew your aggregate utilization ratio and can drop your credit score dramatically. There’s a place for HELOCs, but know your risks going in.
    Great article!

  6. KennyS says:

    * Expect variable interest rates.
    You’ll have to be stupid not to know this. I realized it as soon as they told me it was a variable rate and also when the papers that I signed said it was a variable interest rate.

    * You’ll pay closing costs.
    I didn’t pay a dime for closing costs.

    * Interest-only options can choke you.
    Which is why I didn’t take that.

    My HELOC rate is 0.25% above prime. Much cheaper than credit cards.

    An advantage of a HELOC over a mortgage is that you just write checks as needed. My HELOC is more than I needed.

  7. Debbie says:

    They don’t all charge fees. Get one from a bank that you already use. HELOC’s can be useful for people with discipline. For example, if you plan to borrow money for a car, putting it on a HELOC makes the interest tax deductable. But you have to make sure you pay it off as fast.

  8. SalParadise says:

    Home Equity Lines Of Credit are an excellent financial tool, because as we all know, home values only go up.