Advantages and Disadvantages of Home Equity Lines of Credit
A home equity line of credit, or HELOC, can be just the thing that saves homeowners from financial hardship or even, complete disaster. But just like anything else, this very specific type of second mortgage has its own advantages, and disadvantages.
The biggest advantage that comes with taking out a HELOC is that you’ll have money available to you whenever you need it. These loans are revolving lines of credit that are secured by your home. As such, you can draw from them whenever you need extra cash, whether it’s to send a child to college or make renovations on your home. Many homeowners take out a HELOC and use it as their emergency fund, never using it but planning for “just in case.” With a HELOC, lenders aren’t typically concerned with what you’ll be using the money for.
Another advantage that comes with taking out a HELOC on your home is that no portion of the principal amount is due until the loan expires. Once that happens, it will then turn into a more traditional second mortgage, with no draws being allowed and regular payments being made towards the principal. Up until that period however, only the interest on the loan is due and a homeowner is under no obligation to make payments toward the principal amount.
That does lead to some confusion however; and that confusion is one of the biggest disadvantages that will come with a home equity line of credit. When many homeowners first hear that HELOCs are “no payments necessary” loans, they think that the interest, and only the interest, will be due each month. This however, is not the case. Depending on the lender you choose for your HELOC, you may be required to pay monthly maintenance fees or membership fees that need to be paid – even if you haven’t taken out a penny from the loan.
Of course, the other big disadvantage that comes with a HELOC is that, because it’s a loan that’s secured by your home, you could lose your home if you default on the loan. This is a huge risk that comes with any mortgage, but it’s one that needs to be carefully considered when taking out a HELOC. Unlike a first mortgage, you’re not investing in anything with a second mortgage or HELOC; you’re simply paying for something that you’ve already paid for. While doing so in order to take care of emergencies at home or expand your investor profile can be good options, homeowners need to seriously consider what they want to use a HELOC for, so that they can avoid the “HELOC ATM fever” that has so many in Canada concerned at the moment.
For homeowners that want to wisely tap into their existing home equity to get them out of financial hardship or, further the financial road they’re on, HELOCs can have all the advantages they’re looking for. However use a HELOC incorrectly, and the downsides of these loans will come much too quickly.
Bryan J is the author of this article. For more information about Home equity line of credit or Canadian Mortgage Inc
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