Understanding HELOCs – Part 2

Is it wise to get a HELOC?

Home Equity Lines of Credit can be beneficial when used to increase home value. They can pay off or consolidate high-interest debt, fund a necessity, or bridge a job loss, but simultaneously running up credit card debt is dangerous. HELOCs typically cost less than other forms of borrowing, and interest is only charged when the money is used. They can boost credit history and are easy to qualify for. Interest on funds used to buy, build, or improve property can be tax deductible. The danger is that the home is used as collateral. Missed payments can lead to foreclosure, and risk is created if the property’s market value drops. A HELOC interest rate will exceed current mortgage rates, and there are multiple fees to consider. Variable rates can increase payments and stress your budget. Home equity drops until the balance is repaid, and the increased debt may lower your credit score.

While a HELOC can be helpful in extreme cases, I think it’s best to pay off debt without creating more debt. For most people, this is a safer and wiser path to financial freedom. Don’t use HELOCs to finance depreciating cars, consumer goods, or frivolous wants like vacations and entertainment. Once a HELOC loan begins to amortize, monthly payments can be painful. That’s why borrowers must be disciplined and prepared with a payback plan. Never presume on the future. The Bible warns that debt can become a form of slavery, so pray for wisdom.

Are you struggling with credit card debt? Christian Credit Counselors can create a debt management plan just for you. For more information call the Crown Helpline: 800-722-1976 or visit online at crown.org/ccc.