We’ve seen hundreds of clients who are struggling with debt and desperate for a workable solution. We always discuss the best options for their unique situation, but almost all ask, “Should I take out a home equity line of credit?” at some point. When debt seems overwhelming, this often appears to be a workable solution. Unfortunately, this appearance can be deceiving.
Too often, people think that getting a home equity line of credit is a good way to pay off debts—without realizing that what they actually are doing is moving the debt, not eliminating it. A home equity line of credit is a loan, just like the credit cards where your currently debts are. Unlike credit cards, though, if you can’t pay off the home equity loan, you can lose your home. Few people analyze the risks of the two credit lines while taking this into consideration. Not only would you have your normal mortgage to pay off, but you’d also have the home equity line, both of which could cause your home to go into foreclosure after a default.
Furthermore, most home equity lines of credit require you to borrow tens of thousands of dollars, which, if used entirely, could put you in even worse financial trouble.
Five Times When a Home Equity Line of Credit May Not Be the Solution
In general, we find that even when the numbers “look good” due to lower interest rates and other incentives, the risks of a home equity line of credit far overshadow the potential benefits. In particular, if you are in these five situations, you really should consider other options.
You need it to pay regular bills or other expenses that will not give you a return on your investment. A home equity line of credit is meant to be used for large expenditures that will result in returns on your investment. If you are using it for day-to-day expenses, however, it’s not worth the large risk to your finances. You need to get your finances in order before taking on more (riskier) debt.
Your income is inconsistent. If you miss your monthly payments, your lender could force you out of your home. Unless you are very financially stable, this risk could do real damage. In addition, any missed payments could lead the bank to freeze your credit line. Money will only be allowed to be paid when you need it most.
You could not afford an interest hike. Home equity lines of credit are almost always adjustable-rate loans. That means that you may be surprised by a hike in your interest rate at any time. Look at the lifetime cap offered on these credit lines. They are usually high. Unless you could manage the maximum interest rate without trouble, think twice.
Your home may lose value. Since the collateral for this line of credit is the value of your home, it can be taken away if the value of your home drops dramatically. Once the credit line is frozen, you’ll have to be prepared to pay back what you owe, even despite losing significant money on your largest asset.
You can’t afford the upfront costs. Like a mortgage, a home equity line requires hundreds of dollars in fees upfront. These include fees such as an application fee, title search, appraisal, attorney’s fees, points, and more. Unless you have this money ready to spend without needing to cut into the money you will get on your credit line. It only damages your finances from the get-go.
As you can see, a home equity line of credit is a risky proposition for most homeowners. Unless you can be confident in a stable financial future, you may be better off considering many other less risky solutions. If you are drowning in debt, there are always other options. Call the Cleveland law firm Luftman, Heck, & Associates today at (216) 586-6600 for a free consultation on your case. We will happily discuss all your options so that you can find the best one for your unique situation.