The main disadvantage to opening a home equity line of credit, or HELOC, is that you are putting your house up as collateral. If you cannot pay your outstanding balance, your home is liable to be seized and sold to pay back your creditors.
What Are the Disadvantages of a Home Equity Line of Credit? FAQs
Interest rates for HELOCs can vary widely, depending on the financial institution and other factors. Generally, HELOCs have variable interest rates that are based on an index such as the Prime Rate or LIBOR. Rates can range from as low as 4% to as high as 20%.
A HELOC is an open-ended line of credit secured by the borrower's home, while a home equity loan is typically a lump sum loan with a fixed interest rate and repayment terms. With a HELOC, the borrower can draw on their credit line as needed over the term of the loan, while with a home equity loan, they receive all funds upfront.
Taking out a HELOC increases the amount of debt that is secured by your home, thus increasing the risk of foreclosure if you are unable to make payments. Additionally, if interest rates rise, so too will your monthly payments as HELOCs typically have a variable interest. Finally, it’s important to be aware that taking out a HELOC can affect your credit score, as the additional debt may impact your debt-to-income ratio.
The repayment period for a HELOC typically ranges from 10 to 30 years, depending on the terms of the loan.
Yes, typically lenders charge closing costs and other fees for HELOCs such as annual, origination, and late payment fees. Make sure to read all documents carefully before signing to understand exactly what fees you are responsible for.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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