Is taking out a HELOC a good idea?
Asked by
nmguy (
528
)
July 27th, 2014
I’m in the final stages of applying for a HELOC. I’m doing this in order to cover major, unexpected, future expenses like a new roof, big medical bill, major plumbing repair, etc.
Does anyone have strong feelings about the advantages/disadvantages of HELOCS? I’d be interested in reading them.
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5 Answers
Perhaps you’d tell us what a HELOC is.
A HELOC is a home equity line of credit. It’s like a credit card with a lower interest rate. Your house is the collateral. The amount of the loan depends on the amount of equity you have in your house.
It depends on the rate that you’re getting and the specific terms. They’re a great product, especially if you can find one without an annual fee. Like anything that is credit-related you just need to use it wisely. Having one available is great for the expenses you mentioned.
I took one out early in my home loan and they told me the rate was very low (it was) and locked in for one year. After one year it skyrocketed. They told me it would be prime plus 5%. So right now prime is 3.25 plus another 5 percent would be 8.25 percent. Very high rate right now.
Make sure you know the interest rate and how high it can go and the terms.
The main problem I have with HELOCs is that it is essentially a second mortgage on your house. If all is well, and you have the ongoing ability to pay it back without an issue, then it’s a good and safe use of the appreciation in your house.
On the other hand, if you lose a job, lose a source on income, or in some way are unable to pay it back, then you have essentially lost your house for a relatively small amount of money.
But of course, your situation may be different from someone else’s and it might be just the solution for you.
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