What the HECK Is A HELOC?

If you want to consolidate debt and have done any research you may have heard the term HELOC, but what is it? The acronym HELOC stands for home equity line of credit. A HELOC is an open ended line of credit similar to a credit card, however a piece of real estate, typically your primary residence is used as collateral. HELOCs are powerful financial tools and can be great for debt consolidation but there are some things to be aware of when using them. Please keep in mind that the following statements are about HELOCs in general, each one is different and specifics will depend on the terms of your particular loan and the bank who provides it for you.

Interest Only Payments
One thing to keep in mind with a HELOC is your minimum payment. Typically the minimum payment is interest only which can be great because it gives you flexibility, for example lets say you have a HELOC and you pay $500 each month. If the interest is only $100 that would be all you are required to pay, so if something came up one month you can pay less than you typical $500 one month and not worry about any negative credit impact. The downfall is that if you become accustomed to only paying the minimum payments you will never pay the loan off.

Variable Interest
Another advantage to a HELOC is that they typically offer the lowest interest rates of any loan product at any given time. However, they are usually variable. We are currently seeing the lowest interest rates in history so which direction do you think rates will go in the future (Hint: the answer is not down). Usually the interest rates on a HELOC have to rise quite a bit to get to the rates that your credit cards or other loans are at, but keep in mind that your interest rate will most likely fluctuate.

Early Closure Fees
HELOCs typically have the highest early closure penalties of any loan product on the market. It is usually a percentage of the total limit of your credit line. Just because you pay your line off does not mean you have to close it, but keep the fees in mind if you don't plan to live in your house for very long. Typically the bank will require you to keep the line open for about 3 years.

As I said earlier, a HELOC can be a great tool to use in consolidating your debts or even to make large purchases, but as with every financial decision do your research and make sure it makes sense for you and not get you into trouble.