Tag: HELOC

Beware the HELOC!!!

HELOC is an acronym that stands for home equity line of credit. It is a way for homeowners to access the equity in their homes without actually selling the home. Banks love these kinds of loans because they are secured by the property. For this reason, HELOCs are risky – they put your shelter at risk. This is hardly ever a wise move from the personal finance perspective!

In short, if a homeowner doesn’t repay the HELOC, the bank has the right to foreclose on the home in order to recoup its money.

Another way to think of a HELOC is to view it as a line of credit that is tied to your house. An unsecured line of credit carries a higher borrowing rate, since the bank doesn’t have any recourse if you don’t make your LOC payments as required. Banks presume that most people do not want to lose their house and that they’ll do whatever they have to in order to avoid that unfortunate outcome. As a result, the risk of delinquency is also presumed to be lower than lending borrowers money through an unsecured line of credit. Since the HELOC has a lower risk, the bank charges a lower rate of interest.

Those who’ve been reading my blog for a while now already know that I hate debt. Payments to creditors prevent most people from investing for their futures. Debt forces people to put today’s income towards paying for past purchases.

I especially despise the HELOC. Like all loan products, banks benefit from them more than the consumer. If you have a HELOC, you have to make payments on the loan each month. And if you miss enough payments, then you’re considered delinquent on your debt and the bank can take your house away from you. This is why I personally believe that HELOCs are risky.

Remember! A HELOC is a charge registered against your mortgage. When you take out a HELOC, you’re putting your home up as collateral.

If you really must take out a line of credit, then I would urge you to get an unsecured line of credit. This kind of LOC is not tied to your house. If you fail to pay it, you certainly damage your credit rating… but no one is going to take away your home. It might take 7 years to repair your credit, but so what? It’s better that you repair it from the comfort of your own abode, than suffer the double-whammy of repairing your credit and also losing your home through foreclosure.

Another reason I very much dislike the HELOC is that it is a loan that can be called at any time. A HELOC is a demand loan. That means your bank can demand that you repay it whenever they want.

Let’s say you take out $45,000 of debt via a HELOC against your $375,000 house to do… whatever. (Equity withdrawn via a HELOC can be spent however the homeowner sees fit.) You agree to repay the HELCO at a rate of $750 per month. You’re making your payment as agreed, and getting on with the business of living your life. For reasons they need not declare, your bank gets twitchy and demands that you pay off your outstanding HELOC balance. And if you don’t, they’ll proceed with foreclosure proceedings to get their money bank. You’re suddenly in the position of losing your $375,000 house over a $45,000 debt…Not good!

How are you going to repay the debt? If you’d had the money in the first place, you wouldn’t have borrowed from the bank, right?

I’d suggest that you think long and hard before you take out a HELOC against your home. Make sure you understand what you’re risking before you sign on the dotted line. And if you already have a HELOC, then I suggest that you pay it off as soon as you can.

Life is stressful enough. The risk of your home possibly being the subject of a foreclosure is one added stress that you should work very hard to avoid.

What is a HELOC?

What is a Home Equity Line Of Credit? Short answer – it’s a debt trap that’s best avoided.

At its heart, a HELOC is a debt product that banks offer to homeowners which permits the homeowner to go into debt by spending the equity in their home without selling it first.

For example, if you have $200,000 worth of equity in your home, you can get a HELOC for an amount up to $200,000 depending on the lender. Without a HELOC, you would have to sell your home to get your hands on the equity. In other words, someone would give you money in exchange for your house and you could then spend that money however you wanted. There would be no fees or interest payable on that money because it would be yours.

The HELOC is a completely different beast. With a HELOC, you get access to the equity in your home via a loan from the bank without first having to sell your home. This sounds like a good thing, but it’s a debt-trap that you would be wise to avoid.

Banks charge interest on outstanding HELOC balances

You must keep in mind that the banks will charge you interest if you use a HELOC. Again, you’re spending your equity via a loan from the bank. Any bank loan is accompanied by an interest payment. Interest accrues until such time as the HELOC balance is repaid in full and it runs from the moment that you use it.

The interest rate on a HELOC is usually lower than the interest rate charged on a regular Line Of Credit. A regular LOC is an unsecured product, whereas your home secures the HELOC. If you don’t pay back your LOC, the bank cannot initiate foreclosure proceedings and take your home away from you. This is why they charge you a higher interest rate on a LOC.

Banks can foreclose on you if you don’t repay your HELOC

Before extending you a HELOC, the bank puts a charge on the title to your home. This charge against your title is similar to a mortgage. It ensures that if you ever sell your home, the bank’s HELOC will be repaid from the proceeds of the sale. You’ll get whatever’s leftover after the mortgage debt and the HELOC debt have been repaid.

Again, this particular debt product is essentially a loan against your home. It allows you to spend the equity in your home however you want. No one will be watching you to ensure that you don’t spend your equity on items which will not increase your financial security.

Having a charge on your title makes you vulnerable. Should you fail to make your monthly payment on the outstanding HELOC balance, the bank has the right to foreclose on your home to get its money back. Also, the bank has the right to demand full repayment on an outstanding HELOC balance whenever it wants. If you can’t repay the balance when asked, the bank has the right to foreclose on your home to get its money back.

Let’s say that your housing market goes down and the amount of equity in your home drops simultaneously. You house used to be worth $350,000 but now it’s only worth $250,000. Effectively , you’ve lost $100,000 worth of equity in your home. The bank may get nervous because their loan to you, in the form of the HELOC, is no longer backed by an asset that can fully repay the outstanding balance. The bank may decide to cut its losses, which means that they will demand full repayment of the outstanding loan balance. Should you not repay that balance, then the bank can proceed to foreclosure in order to get its money back before all of the equity in your home disappears due to market conditions.

HELOCs facilitate the siphoning of your home equity in dribs and drabs

When you use a HELOC, you are spending the equity in your home instead of increasing it. You are increasing the debt owed on your home each time you spend its equity.

One of the most dangerous ways to use a HELOC is to have it attached to your debit card. There is nothing stopping you from spending your home’s equity on mundane items. Think of trips to the coffeeshop, to purchase concert / sports tickets, to buy clothes, to finance your daily life. If you need a HELOC to survive from on paycheque to the next, then you’re living above your means. You’re working your way into a severe debt trap. Figure out how to free yourself and stop digging a bigger debt hole.

If there is ever a good use for a HELOC, it’s to make major repairs to your home that are required for your safety, i.e. replacing the furnace or the roof.

There is nothing wrong with you spending your home equity on the costs of your daily life if you need to. Just don’t do it via a HELOC! The wiser course of action is to sell your house and get the cash. That way, the entire amount of your home’s equity is available for your life’s expenses. You won’t be paying interest and fees to the bank for the privilege of spending your own money. You won’t run the risk of foreclosure. You won’t be indebted to the bank. And the money is still yours to spend as you wish.