Home Equity Line of Credit: The Pros and Cons

Every homeowner faces a tough situation from time to time. Whether it is a medical emergency or the children’s education, these big expenses can put a massive dent in their budget. One of the options that they can turn to is a home equity line of credit, better known as a HELOC. This is a common liquidity lever accessed by homeowners across the US, especially with the quickly rising home values since the Great Recession. There are both good and bad aspects to a HELOC. Informational sites like Home Equity Wiz can be a valuable resource for those looking to understand the nuances better.

What is a HELOC?

With a home equity line of credit, your home is used as collateral. You should not take this type of loan lightly because it comes with huge consequences. Failure to pay can quickly lower your credit score. Worse, you can end up without a home in the end through foreclosure.

You can use a HELOC to get you out of financial trouble. It works like a second mortgage (or a home equity loan) but can resemble a credit card’s functions. You can withdraw the funds whenever you need money but not in a lump sum, which is often how second mortgages work. Borrowers can use the funds however they want but there is a set amount that they cannot exceed. It will depend on the amount the borrower agreed on the credit line.

The Pros: Why Use HELOCs

The pros above make HELOCs attractive to those who need quick funds. If you are thinking about using a HELOC to fund an upcoming wedding, a celebration, or even a home renovation, here are the benefits that you can get out of it:

  • You can get a HELOC easily. If you have a decent credit history, it is possible that you can get a home equity line of credit without worries. You increase the chance even higher if you have enough equity in your home.
  • It is easy to use with a low-interest rate. Credit card users will find a HELOC easy to understand.
  • It works just like a CC since you only have to pay the interest based on the amount you took from your credit line. A notable difference though is that the interest rate is far lower compared to a credit card.
  • It is more affordable than other types of loan. Aside from the lower interest than a credit card, it is also less expensive if you compare it to a personal loan.
  • You do not have to worry about closing costs. If you have a good credit history, you do not have to pay application fees, appraisal, and closing costs.

The Cons: Why You May Want to Avoid HELOCs

Unfortunately, there are some disadvantages to using HELOCs. Here are some of them:

  • The interest is variable. Although the rates are often low, there is unpredictability when it comes to the monthly payments.
  • It can take a long time to repay the loan. Many homeowners think that they benefit from the low monthly payments. However, if you only repay the minimum required monthly payment, it will take several years to pay off just the principal amount. In short, the loan never goes away unless you pay above the minimum.

As with any loan, you should consider the potential consequences of HELOCs and not just the rewards before you use it to help you. With the right information and strategy, it can be a great option for your financial situation.

Melissa Thompson writes about a wide range of topics, revealing interesting things we didn't know before. She is a freelance USA Today producer, and a Technorati contributor.