Home equity loans are great. They offer a convenient, low-cost way for homeowners to borrow money. However, a HELOC isn’t necessarily right for everyone.
Just because you’ve lived in your home for years and built up quite a bit of equity, doesn’t always mean you should borrow against it. Remember, when you get a HELOC, you’re putting your home up as collateral. In other words, you could lose it.
So who should avoid getting a HELOC? Anyone who finds themselves in any of the following situations:
You can’t afford the upfront costs.
Taking out a HELOC can be expensive depending the lender. In some cases there may be hundreds of dollars of out-of-pocket costs, just like you had when you took out your first mortgage. These include fees for your application, title search, appraisal and attorney, in addition to any points you may have to pay.
Look for a loan with no annual fee, no application fee, and no closing costs if you keep the loan open for a designated period of time - usually twenty four months.
Your income is unstable.
If you think there’s a possibility your income will change for the worse at any point during the loan, then a HELOC is a bad idea. If you were to find yourself short of cash and couldn’t make your monthly payments, your lender could force you out of your home.
The other possibility is that your financial situation worsens and your lender decides to cut off your access to the line of credit. You wouldn’t lose your home, but your HELOC would be closed.
You aren’t looking to borrow much money.
If your HELOC has a lot of upfront costs and you only want to take out a few thousand dollars, it probably isn’t worth it. (In this case, you’re far better off with a low interest credit card.) Also, many financial institutions have minimum draws for their HELOCs, so check out the specifics before signing on the dotted line.
You can’t afford an interest rate hike.
Unless you have a fixed-rate HELOC, you need to be prepared for interest rates to rise over the course of the loan. All adjustable-rate loans have lifetime caps that set the maximum interest rate, so even though your interest rate may not ever get to its highest point, be aware that it’s a possibility and what that would do to your monthly payment.
A HELOC is a great loan option for some people. But is it really right for you? To find out, talk to a Hanscom representative at any one of our branches. With their expert assistance, you can decide if a HELOC is right for your financial situation and needs and if not, what type of loan might suit you better.