Common HELOC Mistakes to Avoid
Choosing to get a HELOC can be a great option for many homeowners. There are many different things you can do with HELOC but there are also some mistakes you can make with one. In this blog, we’ll inform you of what those mistakes are, so you don’t accidentally make them.
What is a HELOC?
A Home Equity Line of Credit is a loan that borrows against a homeowner’s home equity. You can think of it as a credit card. It typically has a draw period that is five to ten years long, during which you can access funds and pay interest. The repayment period is after the draw period, when you can make the remaining principal and interest payments.
What Can a HELOC Be Used for?
You might think a HELOC only covers home-related expenses. However, a HELOC can be used for various things, such as home projects, debt consolidation, emergency expenses, large purchases, and down payments. There are endless possibilities when it comes to a HELOC.
Common HELOC Mistakes
- Borrowing More Than Necessary
When you receive a credit limit that you can spend, you may get excited and start spending without thinking. It’s important to remember that interest is still a thing with HELOCs. You will have to repay the money you borrowed from the loans. The more money you’re borrowing, the more interest you’ll have accruing.
- Ignoring Rate Risk
During the life of your loan, the rate may vary. This would result in higher payments for you. Before getting a HELOC, you can play around with rates and see how the prices change the higher the rate is. It will be easier to determine what you can afford if you know what payments could possibly be if the rates increase.
- Using it for the Wrong Reasons
As mentioned above, you may want to start spending once you get a HELOC. However, there are things that a HELOC shouldn’t be used for, such as everyday expenses. These could be things like groceries, vacations, clothing, and entertainment. Spending money from a HELOC on items such as these would cause significant debt that you’ll have to find the funds for. A HELOC should only be used on things like home projects, debt consolidation, emergency expenses, large purchases, and down payments. You should also only spend it when you know you have the funds to pay it back.
- Poor Repayment Planning
Like a credit card, you have to pay back the money you borrowed. When the draw period ends, it’s your job to pay back the borrowed funds. People can forget about interest and the major role it plays in repayment. You need to take interest into account when you’re planning your repayments. Also, don’t forget that the interest rate can change at any time, impacting your payment amount.
- Lack of Research
You’ll want to look around to find a HELOC with the best rates and fees first before deciding on one. It’s always best to compare your options before taking out a loan. View our HELOC rates.
- Not Having a Plan for the HELOC
If you don’t have a clear plan for what you’re going to use the HELOC for and when, you could end up paying way more than you originally anticipated. If you start spending it on things unintentionally, you’ll lose track of spending and be presented with a large amount at the repayment period. Go into it with a solid plan, knowing exactly what you’re going to use it for and how you’re going to pay the money back to avoid any surprises.
Who Can Apply for a HELOC?
Any homeowner with equity in their home can apply for a HELOC. Apply for a Guardian HELOC.