Why the HELOC removal could be dangerous this year
You can choose a different route.
- HELOCs are known for their flexibility and it is fairly easy to qualify for them.
- Despite these benefits, you have to be careful if you plan to take HELOC off any time soon.
Today, homeowners all over the United States have a lot of stock. This is because home values have increased significantly over the past year, giving property owners the option to borrow against their homes.
If you need money, you can think about taking out a home loan or HELOC. And there are benefits to following this route.
With HELOC, you are not limited to one amount that you can borrow. Instead, you get access to a line of credit that you can use if needed for an extended period of time – sometimes up to 10 years.
Additionally, HELOCs are fairly easy to qualify as they are secured by the equity you have 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 history when deciding whether to lend you money.
But while the HELOC certainly has its advantages, there is one major drawback with taking the HELOC out. And he may come back to haunt you especially this year.
Rising rates mean trouble for HELOCs
While HELOCs can offer a lot of flexibility, one of the things they don’t offer is fixed interest rates on the amount borrowed. The HELOC interest rate is rather volatile which can make your monthly payments fluctuate over time.
If your payments increase significantly, it can be difficult to keep up with them. And if you fall behind on HELOC payments, you risk consequences such as damage to your creditworthiness and the possibility of losing your home.
Meanwhile, the Federal Reserve is moving forward with a series of planned interest rate hikes to slow down the pace of inflation. And that could make any type of loan or credit line with a floating interest rate more expensive in the coming months.
So you really need to be careful when removing the HELOC. You might like the idea of using a line of credit at different times, while for a home loan or personal loan you are borrowing a flat rate. But as interest rates are likely to rise, buying HELOC could mean facing very costly payments.
A better way to borrow now
If you need to borrow money, it really pays off to block a loan with a fixed interest rate. If your credit score is in good shape, a personal loan may be a good choice. But if your credit score is not the best, a home equity loan may result in a lower interest rate as your lender may overlook less than star credit (at least to some extent) if you have large equity in your property.
Of course, no matter which borrowing route you choose, it’s a good idea to keep this amount to a minimum. And that is another HELOC danger. While they offer flexibility, it may be tempting to use HELOC if there is such a credit line. But the ease with which you access this money can trick you into borrowing for the wrong reasons. So between that and the potential for higher interest rates, it’s really worth avoiding HELOC any time soon.
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