You might have heard of getting a home equity line of credit, sometimes abbreviated as HELOC. Maybe you even know someone who has done it. A HELOC is a loan where the lender agrees to lend a maximum amount within a certain period. The collateral they accept is the equity from the borrower’s house.
There are times when getting a HELOC makes sense. For example, you might secure a home equity loan for debt consolidation in some instances. However, there are also times when it’s not the best strategy. We’ll discuss three cases below where you should avoid making this move.
Most people want to go to college. It can open all kinds of doors and make it more likely you’ll land a higher-paying job. College is often expensive, though, and whether you’re the parent or the student you might feel like you have to get creative to cover tuition.
HELOCs usually come with a low-interest rate, so this might seem like a no-lose proposition. The only issue is that your financial situation could change suddenly. For instance, you could lose your job, and it may take some time before you can find another one.
If something like this happens, and you can’t pay down the loan’s principal in five or ten years, you’re stuck with that additional mortgage debt. It might take you many years to get out from under it. Because of this possibility, you should probably exhaust all other options if you or a family member needs college tuition money.
2. Real Estate
You might enjoy watching house flipping or real estate investment shows and think to yourself, “I could do that!” Maybe it looks easy, but if the way you’re coming up with the capital for real estate speculation is by taking out a HELOC, you may want to reconsider.
There’s money in real estate, but there’s also instability. It’s not hyperbole to say that real estate speculation is one of the riskiest ways to invest your cash. Getting a HELOC loan for some real estate that you’re trying to flip or use as a rental property can backfire in a major way if there’s a sudden downturn in the ever-volatile housing market.
Everyone likes to take a vacation, but if the only way you can afford it is to get a HELOC loan, that might not be the best move. If you have some extra cash in a savings account or get a bonus at work, that may be the time to take off for Hawaii.
If you’re getting a HELOC for a vacation, you’re probably spending beyond your means. Instead of getting yourself into the uncertain financial territory by leveraging your home’s equity, consider taking a more modest vacation. You might also take a staycation or wait a year or two until you’ve saved up the money for a more extravagant trip.
Get a HELOC Only if You Need It
Most money gurus would agree that taking out a HELOC loan is something you should only do if you’re in dire need. Doing so because you want to take a lavish vacation probably isn’t the most prudent action. Looking into a HELOC loan when you’re trying to raise the money for college tuition or if you want to invest in some real estate is also a risky proposition.
HELOC loans are usually a better choice if you’re doing something like paying off credit card bills. If you want the money and you’re in one of the scenarios we described, consider it very carefully, as it could backfire.