Drawbacks of Home Equity Lines

HELOCs or home equity lines of credit is one of the best options to cater the needs of extra cash for all homeowners. Homeowners particularly those, who are running out of cash for home repairs, paying off medical bills, financing child’s education or need financial help for other matters.

HELOC, like any other loan type, is also secured by your property i.e. home. Never take a HELOC lightly. That’s because any carelessness towards HELOC can put you in bad financial situation. For instance, failure of loan repayment according to the terms may hurt your credit score and also resulting in the loss of the possession of your home through foreclosure.

Pros of HELOCs

HELOCs offer a number of advantages. You can easily open them if you have considerable equity in your home. Equity is the equal value to the existing value of your home subtracted the total outstanding mortgage balances. The interest rate on the HELCOs is also lower than that on the second mortgage loan. You are required to pay the amount only on the total amount of money that you have borrowed at different times. Moreover, the closing costs of the HELOCs are also more reasonably affordable.

Drawbacks of HELOCs

There are certain drawbacks associated with home equity lines. The interest rates on home equity lines are not constant because of which payments are unpredictable and may rise anytime. You are also required to pay an annual fee in order to keep your HELOC open, even in the case when you don’t use the money.

The biggest disadvantage of home equity is associated with the decline in your home value. If the value of your home declines, you could end up owing more amount of money on your first home loan and the HELOC combine together making the total amount bigger than the actual value of your home. The terms that are used for this situation are “Underwater” or “Upside Down”. These terms mean that neither you won’t be able to refinance your mortgage nor sell your home without difficulty.

HELOCs & Identity Thefts

Homeowners having plenty of home equity should take extra care. That’s because of a new type of fraud in which thieves steal the personal financial information of the homeowner and use it to open a HELOC or sometimes misdirect current HELOC and take the equity of the home.

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