Why releasing a HELOC could be dangerous this year

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You might want to take another path.


Key points

  • HELOCs are known for their flexibility and it can be quite easy to qualify.
  • Despite these benefits, you’ll need to be careful if you’re considering taking out a short-term HELOC.

These days, homeowners across the United States are sitting on a lot of equity. Indeed, home values ​​have increased significantly over the past year, giving homeowners the opportunity to borrow against their homes.

If you need cash, you might consider getting a home equity line of credit, or HELOC. And there are benefits to going this route.

With a HELOC, you are not limited to a single lump sum that you can borrow. Instead, you have access to a line of credit that you can draw on as needed over a long period of time, sometimes up to 10 years.

Plus, HELOCs are pretty easy to qualify because they’re secured by the equity in your home. When you take out an unsecured loan, such as a personal loan, your lender can really only rely on your credit score and your history to determine whether to lend you money.

But while HELOCs certainly have their advantages, there is one major downside to taking out a HELOC. And that might come back to haunt you this particular year.

Rising rates mean trouble for HELOCs

While HELOCs can offer great flexibility, one thing they don’t usually offer is fixed interest rates on the amount you borrow. On the contrary, HELOC interest tends to be variable, which can cause your monthly payments to vary over time.

If your payments increase a lot, they might become difficult to track. And if you fall behind on your HELOC payments, you risk consequences such as damage to your credit score and the possibility of losing your home.

Meanwhile, the Federal Reserve is pushing ahead with a series of planned interest rate hikes in an effort to slow the rate of inflation. And that could make any type of variable interest rate loan or line of credit more expensive in the months ahead.

This is why you really need to proceed with caution when purchasing a HELOC. You might like the idea of ​​being able to tap into a line of credit at different times, whereas with home equity or a personal loan, you borrow a lump sum. But because interest rates are likely to keep rising, taking out a HELOC could mean facing very expensive payments down the line.

A better way to borrow now

If you need to borrow money, it could be very beneficial to lock in a fixed interest rate loan. If your credit score is in good shape, a personal loan might be a good choice. But if your credit score isn’t the best, a home equity loan might result in a lower interest rate because your lender might overlook less-than-stellar credit (at least to some extent) if you have a lot of equity in your property.

Of course, no matter which borrowing route you take, it’s 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 leverage a HELOC if that line of credit is there. But the ease with which you have access to this money could lead you to borrow for the wrong reasons. And so, between that and the potential for higher interest rates, it could really be beneficial to avoid a short-term HELOC.

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