Is Your Property At Risk With A HELOC?


Home Equity Lines Can Put Your Property At Risk

A home equity line of credit (HELOC) is aconvenient and often affordable type of loan. You can tap into a portion of the value of your home, and use the money for virtually anything you want. But if you abuse a HELOC, you can loseyour house—so it’s important to know the pitfalls.

SEE ALSO: How HELOCs Hurt Refinancing

HELOC Basics

With a HELOC you are given a pre-determined borrowing limit, the way you are with most standard credit cards. The amount of the loan depends on how much home equity you have, how good your credit happens to be, and what your overall ratio of personal debt to income is. You can leave the money alone, or tap into it when you decide to by using a check or a debit-style card. However, the collateral behind the loan is your house, so if you default, the bank can repossess it, and sell it through foreclosure. While a HELOC offers the convenience of loans, it also carries high risk, and requires a high level of borrower responsibility.

The Hazardous ATM Mentality

Do not treat your property like a giant automatic teller machine, or you may wind up losing it. That happened to millions of people after the housing market crashed a few years ago. They had leveraged themselves to the hilt by borrowing against home equity that vanished when real estate values plummeted. When you borrow from a bank, you must repay the entire debt, even if it was based on equity that no longer exists. Unable to repay their HELOC loans, many people went into foreclosure, or even bankruptcy. Learn from the mistakes of others, and do not repeat them.

SEE ALSO: Comparing Your Options: Cash-Out Refi vs. HELOC

How To Be Responsible

The best way to avoid making a costly blunder with your HELOC is to follow two simple guidelines.First, never borrow against home equity unless you absolutely need to. Save it for a dire emergency. Even then, hesitate before using that cash. Second, don’t spend HELOC money on any purchase or investment that does not add equity to your home. You can add equity when using a HELOC by spending the money on needed home repairs. You might fix the roof, for example, to avoid more extensive and expensive damage to your house. Expenses that should not be paid for with home equity include lifestyle upgrades like fine dining, extra clothes, new cars, or vacations you cannot otherwise afford. Meanwhile, if you currently have a home equity line of credit, do not get rid of it. Keep it open, but just don’t use it. That looks great on your credit report, because it shows that you qualify for credit, but have the discipline to avoid tapping into it.

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