Risk of More Debt: Among the biggest problems associated with HELOCs is the potential to rack up more debt. Many homeowners might take out HELOCs, which tend to have lower interest rates than credit cards, to pay off high-interest credit cards.
It's not a good idea to use a home equity line of credit (HELOC) to fund a vacation, buy a car, pay off credit card debt, pay for college, or invest in real estate. If you fail to make payments on a home equity line of credit (HELOC), you could lose your house to foreclosure.
… and the downsides
HELOCs and Your Credit
The impact a HELOC has on your credit score depends on how you use the funds and manage the account. ... Using your HELOC to pay off those credit card balances—as long as you keep the balances at zero going forward—will lower your utilization and can give your scores a boost.
Pros and Cons of HELOCs
When we receive an application for a Home Equity Line of Credit (HELOC), we have to determine the value for the property. This, in turn, allows us to determine the amount that can be borrowed. However most times with a HELOC, a full appraisal is not required.
Like a home equity loan, a HELOC can be used for anything you want. However, it's best-suited for long-term, ongoing expenses like home renovations, medical bills or even college tuition. ... A HELOC usually has a variable interest rate based on the fluctuations of an index, such as the prime rate.
At any time, you can pay off any remaining balance owed against your HELOC. ... If you pay off your HELOC balance early, your lender may offer you the choice to close the line of credit or keep it open for future borrowing. Why you should close a HELOC. Sometimes, a lender will charge annual fees for open lines of credit.
HELOC and Resale
If you decide to sell your home, you will have to pay off your HELOC in full before you can close on the sale. The HELOC is tied directly to your house, and if you no longer own the home, you can no longer use it as loan collateral.
Interest on a HELOC or a home equity loan is deductible if you use the funds for renovations to your home—the phrase is "buy, build, or substantially improve." To be deductible, the money must be spent on the property whose equity is the source of the loan.
Generally, a home equity loan is best if you want predictable monthly payments, a HELOC is best if you have ongoing projects and a cash-out refinance is best if you currently have a high interest rate on your mortgage.
You'll need at least a 620 credit score to get a home equity loan, but your lender may have a higher minimum, such as 660 or 680. To get your best rates, shoot for a credit score of 740 or higher, but know that it's possible to qualify for a home equity loan with bad credit.
One common use of HELOC funds is to consolidate credit card debt or pay off other high-interest debts. As mentioned, HELOCs traditionally carry lower interest rates than credit cards and other similar lines of credit. This is an advantage for homeowners who are currently trying to pay down debts.
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