Is your home a house of (credit) cards?
During the housing boom of the mid-2000s, millions of homeowners turned to a form of easy money called a HELOC, or Home Equity Line of Credit. With a HELOC—as opposed to a plain old home equity loan—you get a set credit line that you can draw on over time, with the option of making only a minimum payment each month. They’re like credit cards, only more dangerous: If you fail to make your payments, you can lose your home.
Part of a HELOC’s appeal is that the first $100,000 in interest is tax-deductible. People often use HELOCs to pay off higher-rate debt like credit cards and car loans. But others use HELOCs just to buy more stuff, such as risky investment properties. That’s why it’s still important to remember: Borrower beware.
That doesn’t mean a HELOC is always a bad option. The tax break is real, and a HELOC offers the flexibility to pay off high-rate debt with a lower-rate loan. If you decide a HELOC is right for you:
- Factor in up-front fees. Some lenders charge thousands of dollars in fees, while others waive them. Shop carefully, and if you’re paying a fee, make sure the refinance still makes sense.
- Shop around for the best deal. Check out the offers from several banks; you can compare interest rates at websites like BankRate.com and HSH.com.
- Pay more than the minimum. It can be tempting to make only the minimum payments on a HELOC. Resist temptation! If, for example, you’re using a HELOC to pay off a higher-interest auto loan, try to pay off the HELOC in the same period of time. That way you’re actually taking advantage of the lower interest rate, and not just dragging out the payback period.
What about you? Have you ever taken out a home equity loan of credit? Did it turn out to be a good financial move?