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HELOC – Instant Cash or Hard Pass?

If your property’s value has appreciated significantly since you took ownership or if you were able to afford a sizable down payment at the time of purchase, you may have a considerable amount of equity built up in your home. For many of my clients, their home is the largest investment in their portfolio. So what do you do if you run into a situation where you suddenly need a fairly large amount of cash, but it’s tied up in your home? One option is a Home Equity Line of Credit, or HELOC, but consider the benefits and risks very carefully before you go any further.


Pros:
1. Only borrow what you need. A HELOC is basically a credit card that lets you pay for things with money borrowed from your home’s equity. This makes it possible to pay as you go instead of borrowing a lump sum in the form of a traditional loan that might not be the amount you really need.


2. Use your home’s value to add value. A HELOC can be a great way to add more value to your home by using the value in your home. If you need a new roof or a bathroom remodel but don’t have the cash flow to make it happen, this can be a good option.


3. Access to a large amount of money. Depending on how much equity you have in your home, you could have tens of thousands of dollars available to you through a HELOC versus a much smaller personal loan amount.
 


Cons:
1. Variable Interest Rate. While interest rates on a HELOC are often lower than other types of loans, they can fluctuate over the life of the loan. Make sure you have a clear understanding of the potential range of your interest rate so you don’t get buried in unexpected interest.


2. Temptation to use the money for non-essential purchases. A HELOC should be reserved for home improvements or essential purchases, but once you have easy access to a large sum of cash it can be easy to blur the lines between what you should and shouldn’t spend it on.


3. Payback time. During the “draw” period of your HELOC, or the time when you have access to the money, you are only paying interest on the money you borrow. Once the draw period ends, you enter the repayment period and will have to start paying back the principal amount of your loan. At this point you will essentially have a second mortgage, so it’s important to be financially prepared to keep up with the payments. If you get behind, your home could be at stake.