HELOC drawbacks

Many homeowners try to take advantage of the equity in their home to obtain a home equity line of credit. There are some disadvantages as it relates to a HELOC loan. Let’s take a look at some of these pros that you should be aware of.

The Collateral Risk

Because you will be using your home as the collateral for acquiring the home equity line of credit, it is considered a secured loan and you are taking a risk of losing your home, if you fall short and the loan defaults. You run the risk of foreclosure, if you are unable to keep up with the monthly payments.

Variable Rate of Interest

If you were to opt for a home equity loan, you would receive a lump sum and the interest rate would be fixed. However, with the HELOC, you will have to be content with variable rate of interest, which means that it will fluctuate and so your monthly loan premiums will also be different; depending on the interest rate set by the Federal Reserve on a periodic basis.

Lack of Discipline

There are some borrowers who may have a lack of discipline in making payments. With a HELOC, you get to pay interest only on your loan for a specified time, and that replaces funds to the account, which is revolving and that you can continue using. However, if you don’t have the discipline necessary to carry out your obligation, then you will fall short and get into trouble with your credit history and the lender; possibly losing your home.

Home Equity Reduction

When you use the equity in your home to apply for a HELOC, you are reducing the equity that you have worked to build. For that reason, you may be lengthening the time it takes to pay off your mortgage entirely. If the price or value of your home drops, then you might end up owing the lender more than the property is worth.

Read More >>