Why taking out a HELOC could be dangerous this year
You might want to go a different route.
- HELOCs are known for their flexibility and qualifying for them can be fairly easy.
- Despite these benefits, you need to be careful if you plan on taking out a HELOC in the near future.
Homeowners in the US are sitting on a lot of equity these days. That’s because property values have risen significantly over the past year, and that gives homeowners an opportunity to borrow money for their homes.
If you need money, you might consider taking out a home equity line of credit, or HELOC. And there are advantages to going this route.
With a HELOC, you are not limited to a single lump sum to borrow. Rather, you get access to a line of credit that you can draw on for a longer period of time – sometimes up to 10 years.
Also, HELOCs are fairly easy to qualify since they are backed by the equity you have in your home. If you take out an unsecured loan such as For example, a personal loan, your lender can really only rely on your creditworthiness and history when deciding whether to lend you money.
But while HELOCs certainly have their advantages, there is a major downside to taking out a HELOC. And it might hit you especially hard this year.
Rising rates spell trouble for HELOCs
While HELOCs offer a lot of flexibility, they typically don’t offer fixed interest rates on the amount you borrow. Rather, HELOC rates tend to be variable, which can cause your monthly payments to change over time.
When your payments skyrocket, it can be difficult to keep up with them. And if you default on your HELOC payments, you risk consequences like damaged credit ratings and the possibility of losing your home.
Meanwhile, the Federal Reserve is pushing ahead with a series of planned rate hikes to curb inflation. And that could make any type of variable-rate loan or line of credit more expensive in the coming months.
That’s why you should be really careful when taking out a HELOC. You might like the idea of being able to draw a line of credit at multiple times while borrowing a lump sum on a home or personal loan. However, with interest rates likely to continue to rise, taking out a HELOC could mean very expensive payments down the road.
A better way to borrow money now
If you need to borrow money, taking out a fixed rate loan can really pay off. If your credit is good, a personal loan could be a smart choice. But if your credit isn’t the best, then a home equity loan could result in a lower interest rate, since your lender could overlook less than great credit (at least to some extent) if you have a lot of equity in your property.
Regardless of which credit route you choose, it’s obviously a good idea to keep this amount to a minimum. And that’s another danger of HELOCs. While they offer flexibility, it can be tempting to tap into a HELOC when that line of credit is in place. But the ease with which you can access that money could lead you to borrow for the wrong reasons. So, given that and the potential for higher interest rates, it could really pay off to stay away from a HELOC in the short-term.
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