A home equity line of credit (HELOC) is a convenient and powerful tool that allows you to tap your home’s equity. If you are looking to finance a home renovation or consolidate high-interest debt, a HELOC could be just what you need. However, because of its versatility, you may be tempted to utilize your HELOC for things you probably shouldn’t. Let’s look at some common examples of when not to use a HELOC:
To Take a Vacation
A HELOC can give you access to a large sum of money, which may seem like a solution to fund a vacation you can’t afford. If you are accessing your home’s equity for this purpose, then you may be putting yourself in a difficult financial situation trying to pay that money back, with the addition of any applicable interest. Since a HELOC uses your house as collateral, you risk losing your home by not remitting timely payment.
To Buy a Car
Auto loans typically offer better interest rates and terms than a HELOC to finance a new or used vehicle. Additionally, auto loans have a fixed term, meaning you’ll pay off the loan within a certain amount of time (i.e. 36, 48 or 65 months). With a HELOC, those same requirements don’t exist. You could end up owing money on your car for far longer than you would with an auto loan. In addition, your auto loan is secured by your car making the loan far less risky than a HELOC.
To Invest in Real Estate
Why not try to make some money using your HELOC by investing in real estate? Simply put: It’s a big risk. There’s no guarantee that a real estate investment will turn a profit. And even if it does, having your money tied up in real estate means you won’t have it available to repay your HELOC quickly.
To Help With Cash Flow
Finding yourself short on cash some days? You may be tempted to use a HELOC to ease the costs of everyday living. But if you’re already having trouble with money, borrowing more money (especially against your home’s equity) isn’t a long-term solution. It’s a significant risk to assume you’ll be able to repay the money in the future. And the price of not being able to pay could mean the loss of your home.
Use Your HELOC Wisely
There are many great ways to use a HELOC. If you have any questions or concerns about how to use a HELOC, feel free to contact us. You can reach a DCU member representative by sending us an email, visiting a branch, or calling 800.328.8797.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
*Earn More is a sweep feature. Eligible balances are automatically swept out to FDIC and/or NCUA insured deposit accounts held at participating financial institutions throughout the country. You will still have access to your checking account funds. The feature becomes activated on the first of the month following the month enrollment took place. The feature can only be added to one checking account per membership, excluding HSA Checking accounts. Learn More about the Earn More Feature here.
