As a homeowner in this current crisis, you may be facing a stack of mounting bills and looking at some of the financial options available to you. One you may be considering is a Home Equity Line of Credit, a HELOC.
HELOCs are a version of a second mortgage. Some homeowners have been deluged with offers of HELOCs and have eyed them suspiciously, although they are not scams but that isn’t to say that they’re a good idea either.
What exactly is a HELOC anyway?
HELOC stands for home equity line of credit. It’s quite different than a home equity loan. The latter is a lump-sum loan with your home as collateral. Typically its paid back in monthly installments, over an mutually agreed upon term spanning 5-30 years. These loans are common for massive one-time expenses – like debt consolidation or even weddings (which is really ill-advised, because going into debt at the beginning of a marriage is surefire way to shorten it).
A HELOC is different. It lets you borrow money against the equity you’ve built up in your home mortgage via payments. (Equity equals the appraised value of the home minus what you owe on the mortgage.) Think of it like a credit card: You can draw from it in different amounts and repay all or some of it monthly. But here’s the caveat, if you’re not careful, missing payments could mean that you’ll lose your home.
In both cases – home equity loans or lines of credit – you pay both fees and interest. Neither is something to rush into. My review here is basic at most, but HELOCs can be quite complicated, and many lenders will entice you with offers that are hard to compare accurately.
Will a HELOC help me make it through this crisis?
Unless you’re the kind of person with the patience to study fine print, HELOCs aren’t for you not even in the best of times. That’s because the risk of losing your home can be quite high under these circumstances. And you’re using your most expensive and vital possession – your family’s home – as collateral, which means you can lose it if you’re not extremely careful in a volatile “whatever can go wrong will go wrong” scenario. And we all know that when people are being the least careful? When they’re so worried about many other things and juggling problems they’ve never had to face before. And there’s the reality that, there’s the very uncertain timeline for life to return to normal.
There are better, less risky fixes.
Why not try something just as satisfying but cheaper? In this case, you have an entire menu of options. Those include a debt management program, debt consolidation, debt settlement, and even mortgage relief, which many lenders are offering due to the extent and financial impact of the crisis. (And you ask, why would lenders let you suspend your payments for up to a year? They’d rather that you didn’t go broke, because they would lose a paying customer.)
Figuring out which option is best for you – or what combination has the most upside advantages with the least risk – is a tough thing to do without professional guidance and help. Contact a certified financial mortgage professional. They should encourage you obtain a thorough free debt analysis to determine if a HELOC is the best choice for you. And if they don’t, hang up and try somewhere else immediately.