Applying for a HELOC is serious decision that needs careful consideration of several things. You can’t just apply for a HELOC with no battle plan in mind and no real purpose for applying for this type of home loan. Here are 5 questions you must make sure to ask before you apply for a HELOC.
Are you aware of what makes HELOC different to a home equity loan?
Both HELOC and a home equity loan allow you to tap your equity but you will be able to use more of your equity with a HELOC as compared to a home equity loan. A HELOC is also a revolving type of credit whilst a home equity loan is a one-time lump sum loan.
A HELOC would be a better option for you if you know that you will have multiple substantial expenses in the future. Another pro about getting a HELOC is that you will only pay interest on the amount that you’ve actually taken out.
Are you sure that you can pay it back?
Getting a HELOC can seem like a quick hack to get access to funds but remember that a HELOC is a secured loan with your home as the collateral. If you fail to pay credit cards the worst that can happen is a lawsuit but failing to pay back a HELOC means you and your entire family can go homeless. This is why it is so important to make sure that you get a HELOC with reasonable terms with the help of a mortgage broker who’s also thinking ahead for you.
Are you okay with variable interest rates?
A home equity line of credit has a variable interest rate that is usually tied to whatever the present economic condition is. You might have a very low interest rate now but who knows what will happen in the future? Economic changes can adjust your HELOC interest rate many times over. Are you prepared to handle this uncertainty?
Are you going to use your HELOC wisely?
Using your HELOC to consolidate high-interest debts is a smart decision but using it to finance vacations you can’t afford may lead to you losing your home for non-payment. This is why you must think long and hard and discuss applying for a HELOC with a mortgage professional so you won’t end up finding about important details when it is too late.
Are you thinking about financial flexibility?
Veering off slightly from the subject of using your HELOC wisely, you have to be sure that getting a HELOC is the right financial move for you because of huge risks involved as mentioned earlier. You have to be sure that you are applying for the right reasons such as having a need for the financial flexibility that a HELOC can give you and not just because you love the idea of having a huge-limit-revolving-credit-card. Instead of using a HELOC for purposes that generate more debt, why not use it for purposes that either save you money (like debt consolidation) or make money you money (like an equity-boosting home remodel). The financial flexibility possibilities are there, you just have to know how to use it for your best benefit.