Five Ways NOT to Use Your HELOC

Five Ways NOT to Use Your HELOC

A home equity line of credit can help you access the equity in your home at a low cost. But don’t be tempted to use your HELOC like a piggy bank: Click through for some advice on how to use your HELOC prudently.
One of the benefits of owning a home is the chance to build equity. Equity is the difference between what you owe on your mortgage and what your home is worth. If your home is worth $300,000 and you owe $100,000 on your mortgage, you have $200,000 of equity.
One of the benefits of owning a home is the chance to build equity. Equity is the difference between what you owe on your mortgage and what your home is worth. If your home is worth $300,000 and you owe $100,000 on your mortgage, you have $200,000 of equity.
You can then borrow up to that limit to spend the funds on whatever you want. And you only pay back what you borrow. Say you need to spend $50,000 on a major kitchen renovation. You can borrow that $50,000 from your HELOC. You’ll then pay back what you borrowed in regular monthly payments, with interest. HELOCs tend to come with lower interest rates than credit cards or personal loans do, which makes them a more affordable option when financing home repairs or renovations. Using your HELOC to fund improvements that will increase the value of your home is the best use of your HELOC dollars. You’ll even gain a tax benefit: You can write off the interest you pay on your HELOC if you use the funds for renovations or improvements that boost the value of your home.

What should NOT be financed with a HELOC

A dream vacation: You might want to fly to Europe or take that Alaskan cruise. But save up money to pay for it; don’t use your HELOC to fund it. If you fall behind on your HELOC payments, your lender can foreclose on you, eventually evicting you from your home and taking possession of it. Taking that risk to fund a vacation isn’t worth it.

Your or your children’s college education: Because the interest rates with HELOCs can be lower than what you’d get with private student loans, you might consider funding all or part of your or your children’s college tuition with a HELOC. Again, this is risky. If you stop making student loan payments, your credit score will tumble. But your lenders can’t take possession of your home. The same can’t be said if you stop making payments on a HELOC.

A big wedding: We get it: Weddings can be expensive. But again, funding a wedding — yours or one of your children’s — with a HELOC can put your home at risk. It’s not worth it for what is essentially a one-day event.

Stock market investments: You can make a lot of money by investing in the stock market. You can lose a lot, too. And if you use your HELOC to pay for your stock market investments? You might even lose your home if you fall behind on your payments. Again, the potential gain isn’t worth the risk. If you want to invest in the stock market, use your own funds that you’ve saved.

Credit card debt: This is a little trickier. Credit card debt comes with sky-high interest rates. It might make financial sense, then, to use a HELOC to pay off your credit card debt, as the interest rate attached to the money you’ve borrowed against your HELOC will be far lower. Again, though, there is risk. If you’re worried that you won’t be able to afford your HELOC payments, don’t borrow against your line of credit to pay off your credit card debt. Your credit card provider can’t foreclose on your home if you fall behind on your payments. 

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Thinking of applying for a real estate loan? Before you get caught up in internet searches, click bait, or ‘big box’ lender applications online, check out a few reasons we highly recommend using a local and trusted lender:
  • Local lenders are your neighbors and know the area intimately. They shop at the same grocery stores, shopping malls, and dine in the same restaurants as you.
  • They have relationships that extend beyond a closing table or transaction. Most local lenders have a direct connection to underwriters and processors, which can eliminate days, and even weeks, from the process of closing a loan.
  • Local lenders are proven to close loans on average faster than larger banks.
  • Because they are local, they understand the local market.
  • Most all local lenders we network with provide their personal cell phone number to their clients. This provides you with a more responsive method of communication and can help expedite important manners more efficiently.
  • Local lenders are often far more diversified in their lending options, which in turn can offer you products and services that many of the large banks do not offer. Overall, opening up your lending options with a local and trusted lender could save you time, money, and in turn help you find the best product for your unique situation.
  • Local lenders typically will have files go through the underwriting process upfront, rather than waiting until the week of your closing. This is crucial if you are purchasing a home or property and have earnest money deposited. We have seen clients choose to go with larger named lending institutions that promise, or bait consumers, into clicking online through an application offering ‘exclusive’ or ‘lower rates’ than the current average. A lot of the time these types of ads will trick a consumer into working with these larger companies, and the true fees are not disclosed upfront, the files are not examined by a trained and experienced Loan Officer, and the consumer (you) ends up in a compromised situation that costs them not only thousands of dollars, but the home they were under contract to purchase as well.  
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