Avoid Home Equity Loans
Home equity loans, otherwise known as home equity lines of credit or HELOCs, are bad news for most people. While no product is bad all the time, home equity loans are pretty close to being universally unwise. The following are just five of the reasons why you should steer clear of these potentially dangerous debt instruments.
The Rates Often Change
HELOCs are a type of loan that generally has a variable interest rate. Since interest rates are about as low as they can ever get, the loan you take out today is bound to go up. While some home equity lines will allow you to lock in a rate, that rate won’t be as low as they’re advertising today. This is like a credit card where your home is at stake and should be avoided if you don’t want yours to suddenly be amongst the Rancho Santa Fe homes for sale.
Your Home Value will Turn Upside Down
Do you owe more on your home than it’s worth? With a HELOC, you have that ability. Rather like a book of matches, a home equity loan is dangerous to mess with because it can endanger your home. If house prices take a tumble again, do you want to owe more than your home is worth? Of course not
The Money is Easy to Spend
You might think you have self-control and can resist the urge to blow “just a little” of the tens of thousands of dollars your equity loan might provide for you. But you don’t have that much self-control. You’ll want to take a vacation, or buy a new TV, or maybe a car. Almost without exception, people who have easy access to money they haven’t had to work for spend it and later regret doing so. So why put yourself in that position in the first place?
Home Equity Loans Involve Fees
HELOCs usually charge people fees to have access to the money. Do you like paying to keep open an account? Again, of course not. Keep in mind that this account can cost you your home, and the bank may freeze it whenever they decide to do so.
They’re Not Reliable Emergency Funds
An emergency fund should always be cash. As annoying as it is to not make much interest on it, it’s more reliable than an equity loan. These types of loans tend to be frozen during bad economic times — either yours or for the larger economy. Usually that’s when you need the money the most, so don’t even consider it.
A home equity loan and its brethren are bad news. Of all the things you can do with your home, this ranks about as well as digging a moat and using it as your sewer.