What To Consider Before Taking Out A Home Equity Line Of Credit

If you are looking for a way to pay for college, medical expenses or home improvement projects and have some equity in your home you may want to look into getting a home equity line of credit (HELOCs).  A HELOC works like a credit card because it gives you a credit limit and you can take out money in increments rather than a home equity loan, which gives you the money all at once.  Before you call your bank, you may want to finish reading this article because here are a few things to consider before taking out a home equity line of credit.Taking Out A Home Equity Line Of Credit

Interest Rate And Rates Risks

A HELOC may work a little like a credit card but the interest rate will generally be much lower on a home equity line of credit.  Greg McBride, a financial analyst, states, “For savvy borrowers, this can be a low cost source of funds for home improvement projects or other needs.” Because you are using your home as security for the loan, your lender (generally your bank) has a lower risk of taking a loss if you get into a financial pickle.  Many lenders even offer introductory rates to make HELOCs even more affordable that can be adjustable.  Many consumers choose adjustable rate HELOCs because they are initially cheaper than fixed rates.  Consumers that choose an adjustable rate HELOC should check their loan agreement to see how high the rate could go then compare to the fixed rate option to see which HELOC rate works best for them.


Depending on how you use your HELOC, this type of borrowing can be cheap but it can also be costly.  If you use your line of credit a lot, then it is a cheap form of borrowing compared to credit cards or other personal loans.  If you hardly ever use your line of credit and use your line of credit for only small sums, all of the fees and charges could make the cost of borrowing smaller amounts very expensive.

Debt Consolidation

If you have many credit card balances or other loans at high interest rates, you may be able to significantly reduce your monthly payments by taking out a HELOC.  If you are financially secure, taking out a HELOC can be a smart financial decision but it can have drawbacks.  Essentially you are turning unsecured debt into secured debt.  If you suffer a financial hardship and get behind on payments, you could lose your home.

Before taking out any kind of loan it is important to understand what  the pros and cons of HELOCs are and what exactly a home equity line of credit is.  Talk with your bank to see if taking out a home equity line of credit would be a good option to pay down credit cards, personal loans or finance home improvement projects.