Home values have been rising, while at the same time homeowners have been diligently paying down their mortgage debt. That’s all good, right? Well, now financial institutions may try to entice you to re-up that mortgage debt and tap into the thousands of dollars of equity in your home.
In fact, home equity lines of credit are making a comeback. The issuance of HELOCs topped $156 billion in 2015, according to mortgage data firm CoreLogic. That’s a 138% increase since 2010.
Is this a good time for you to open a HELOC? Let’s consider the pros and cons.
When a HELOC Makes Sense
Just about every financial expert agrees: Using a home equity line of credit to improve, remodel or repair your home is often a good idea.
With interest rates still low, if you’re in a good financial place right now — holding a solid job, having manageable debt, and planning to live right where you are for the next several years — a HELOC could be just what your home’s outdated kitchen, gloomy bathroom or paint-peeling exterior needs.
That’s the sunny side of the street. Now, let’s cross over to the darker side.
When a HELOC Might Not Be a Good Idea
Experts are less unified about whether a HELOC should be used for purposes other than upgrading your home.
Some folks will encourage you to take out a tax-deductible, low-rate HELOC to pay off high-interest credit cards or personal loans. Thing is, a home equity line is a second mortgage and it’s “secured” — your home is the collateral you put up. So you’ll be putting your home at risk to replace unsecured consumer debt.
If you get behind on your credit card debt, collectors sure can make your life miserable — but they can’t take your home. But if you get past due on your HELOC mortgage, that’s exactly what can happen.
If you’re finding money tight, a HELOC might improve your short-term cash flow, but as a long-term bet it’s generally not a good risk.
Remember that HELOCs are usually variable-interest-rate loans. The rate may be low today but creep up over the coming years. If you’re not diligently paying it off, you might end up climbing a high-rate mountain of debt.
Day-to-day cash flow woes aren’t cured by trading one debt for another. The real solution is all about reducing expenses, raising income and paying off bills.
Be Careful About Taking the Bait of a Teaser Rate
When lenders see an opening, they build a marketing pitch quickly. Just in the last couple of months, some high-profile lenders have begun hawking HELOC specials. One of the most common: low introductory interest rates for a limited time. You might get something along the lines of 1.99% interest for six months, but then all bets are off.
Wait. We’ve been here before. Isn’t this how the housing crisis began?
You may be tempted. No cost, no appraisal, no interest — no problem? But sometimes you have to just say no.
Is a HELOC Right for You?
Obvious statement alert: In order to tap the equity in your home, you’ve got to have some. CoreLogic says that the number of homeowners with more than 20% equity — prime candidates for home equity lines of credit — are “rising rapidly.” Just in the fourth quarter of 2015, home equity increased by 11.5% — a whopping $680 billion — marking the 13th consecutive quarter of double-digit home equity growth.
If you’ve seen your home’s equity swell, you can keep it tucked away in the walls of your house as an asset growing for the future. Or you can draw wisely on a home equity line for good reason — usually repairs and upgrades — and add a bit more value to your home.
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