As inflation and rising costs continue to plague consumers, home equity lines of credit (HELOCs) have surged in popularity, with balances reaching $387 billion between mid-2023 and 2024. Many homeowners see them as an affordable way to tap into their home’s value for major expenses or debt consolidation.
Increased Debt
Don’t be fooled, a HELOC isn’t a windfall—it’s debt. Borrowing against your home’s equity puts your property on the line, and failure to repay could mean serious consequences. Adding to the risk is the variable interest rate structure of most HELOCs. What starts as a manageable payment can quickly rise if rates increase, catching borrowers off guard. Over-borrowing can also leave you vulnerable, especially if property values drop.
Use The Money Wisely
A HELOC can be a valuable tool, especially for projects that add value to your home. But it’s not a free pass to splurge. Experts agree these loans should be reserved for responsible, long-term financial goals, not impulse spending. A dream vacation at a five-star resort in an exotic locale may sound great, but are you willing to risk your home to pay for it? Here are a few other ways NOT to spend your HELOC.
- Paying for Everyday Bills: Relying on a HELOC to cover routine expenses is a slippery slope. If your budget is already stretched thin, adding more debt only worsens the problem. A better approach is to explore options like loan modifications or mortgage forbearance, which can provide relief without compounding your financial challenges.
- Buying Items That Depreciate: Tapping into your home equity for items like cars, furniture, or other quickly depreciating assets is rarely a smart move. These purchases lose value over time, while the debt remains tied to your home. Don’t risk using a HELOC for things that don’t build wealth or offer a return on investment.
When used wisely, a HELOC can be a practical financial tool, particularly for home upgrades or emergencies. However, it’s crucial to approach this type of borrowing cautiously. Avoid using it for non-essential expenses or purchases that won’t improve your financial position in the long run.
Ultimately, your home is one of your most valuable assets, and borrowing against it comes with serious responsibility. For more information on home equity lines of credit, reach out to an FRC® trained advisor who can offer expert advice.
