3 Ways NOT To Use A HELOC

Posted on: 25 November 2017

If you're like many people, your house may be one of your biggest investments. When you have built a lot of equity in your home, you may begin to consider applying for a home equity line of credit (HELOC), so you can access some of the funds without selling your home. In some situations, a HELOC is an excellent option, but you need to know what you will be using the money for. But taking out money through a HELOC can also be a financially poor choice. If you're considering applying for a HELOC, avoid using the money for the following:

Living Beyond Your Means

It is important to note that a HELOC is not free money, and you will have to pay it back. Thus, using a HELOC to live beyond your means is never a good idea. Don't take out a HELOC to fund vacations, buy recreational vehicles, purchase luxury goods, or to do things that you otherwise can't afford to do. Taking out a HELOC and spending frivolously will just eventually put you into more debt and you will be left with a bill to pay and nothing to show for it.

Buying a Car

HELOCs often offer very attractive interest rates, so many people assume that they are better off taking out a HELOC to get the funds needed to purchase a car instead of paying the higher interest rates on an auto loan. In reality, taking out a HELOC to pay for a car is a very bad idea.

If you hit hard times financially and can't make payments on your auto loan promptly, the worst case scenario is that your car will be repossessed. But if you take out a large amount of money from your HELOC to buy a car and then can't pay it back according to the terms of the loan, you risk losing your house. Your house is a much more valuable asset than a car-- don't put it at risk by using funds from a HELOC for the wrong reasons.

Get Rid of Credit Card Debt

The interest rate on a HELOC is almost always substantially lower than the interest charged by credit card companies. It is not uncommon for people to rack up credit card debt and then consider using a HELOC to pay off the debt. While doing this may save you some money on the interest you pay on the debt owed; it has the same risks involved with using a HELOC to buy a car. Your credit card debt may be paid off, but if you can't pay back the lender who issued your HELOC, the bank can foreclose on your house.