Is a HELOC a Good Idea?

A member called our office last week looking for advice on taking a Home Equity Line of Credit (HELOC). Borrowing rates continue to increase, and she asked if there were any other options available to get a lower rate or to lower her payment.

“What are people doing?”

It is a question many members are asking these days. It is not a simple one to answer.

Higher grocery bills, the cost of heating our homes, interest rates creeping up, and student loan repayments can seem overwhelming.

What is Happening?

During inflation, the cost of everything from food and housing to health care can rise. As prices go up, your purchasing power goes down. That means, even if you are doing the same things as last year, it is going to cost you more money this year. 

As inflation rises, raising interest rates makes consumers spend less. These increased rates make it more expensive to borrow money, making paying off existing debt more costly.

Rising Rates Impact Home Equity

When interest rates rise, it becomes more expensive for banks to borrow money, and that cost is passed on to borrowers in the form of higher interest. Many homeowners are now reevaluating their financial options. One that is gaining attention is the Home Equity Line of Credit (HELOC). A HELOC allows homeowners to borrow against the equity in their homes, providing a flexible source of funds to use. However, with interest rates at elevated levels, is taking out a HELOC still a good idea?

Back to the question: “What are people doing?”

Understanding a HELOC

 A Home Equity Line of Credit is a type of revolving credit that is secured by your home. It works like a credit card but with your home as collateral. The amount you can borrow is typically determined by the equity you have in your home. You can access funds as needed, up to a certain credit limit, and repay the borrowed amount with interest.

Pros of a HELOC

• Lower Interest Rates: Even with higher interest rates, HELOCs often offer lower rates compared to credit cards or personal loans.
• Flexibility: HELOCs provide flexibility as you can borrow what you need when you need it, which is useful for funding home renovations, education, or unexpected expenses.
• Competitive Terms: While interest rates have risen, many lenders still offer competitive terms and repayment options on HELOCs, making them more accessible to homeowners.

Cons of a HELOC

• Risk: Because a HELOC is secured by your home, if you fail to repay your loans, you could lose your home through foreclosure.
• Variable Rates: HELOCs typically have variable rates, which means your monthly payments can fluctuate with changes in rates.
• Possible Overspending: Access to funds with HELOC can tempt some owners to overspend, leading to increased debt and financial strain.
• More Debt: Using a HELOC to consolidate high-interest debt to cover daily expenses can lead to more debt if higher interest rates persist.

Taking out a Home Equity Line of Credit should be a decision made after careful consideration of the risks and benefits. It is important to assess your financial stability and make sure it aligns with your long-term financial goals.