HELOC mistakes to avoid
A home equity line of credit (HELOC) can be a cost-effective way to finance everything from home improvements to your retirement. HELOCs allow you to access the value you've built in your home at a rate that's often considerably lower than options like credit cards and personal loans.
But to get the most out of a HELOC — and prevent financial difficulties down the line — it's important to use this product wisely. There are several traps homeowners fall into with HELOCs, each of which can be quite costly. In this article, we'll discuss some of the most common ones and how to avoid them.
Check out today's HELOC rates to see how much you could borrow.
HELOC mistakes to avoid
Knowledge is power. Understand the following HELOC mistakes so you don't make them yourself.
Applying with a low credit score
Your credit score plays a big role in the HELOC rate you receive. Most lenders look for scores in at least the mid-to-high 600s, but those 700 or above qualify for the best rates. So if your score is on the low end, take the time to improve it before you apply so you don't pay more interest than you need to.
Begin exploring your HELOC options by reviewing current rates here.
Not shopping around
You have plenty of options to choose from when it comes to taking out a HELOC, and they come with a wide range of rates, terms and fees. Don't just settle for the first offer that looks good. Take the time to compare multiple lenders in addition to your original mortgage lender to find the best deal available.
Borrowing more than you can afford
A HELOC is a revolving credit line, like a credit card, which means you can borrow from it whenever you want as long as you stay within your credit limit. However, this flexibility can be a double-edged sword if its leads to overspending or impulse purchases.
Borrowing too much leaves you with a heavier debt load, which can strain your finances. So, before you take out a HELOC, make sure you have a clear purpose for the funds, identify how much you really need and only borrow that amount.
Also, make sure you can comfortably afford the payments for the amount you borrow. Failure to make payments on time can result in late fees, a lower credit score and even foreclosure since the loan is secured by your home. Review your budget to ensure you won't have trouble making payments on time, bearing in mind that HELOC rates are variable, so your payments may go up in the future.
Find the best HELOC for you by comparing offers online now.
Not reading the fine print
As with any financial product, it's important to read and understand all the terms and conditions of a HELOC. Some lenders may charge high upfront fees, annual fees or prepayment penalties — and some of these fees may be buried in long blocks of text.
It may feel tedious, but take the time to read through everything before you sign on the dotted line. Knowing precisely what you're agreeing to will help you make an informed decision and protect you from negative consequences you weren't expecting.
The bottom line
A home equity line of credit can be a helpful financial tool when used correctly. By applying with a good credit score, shopping around, borrowing only what you can afford and carefully reading the fine print, you can avoid the common HELOC mistakes many homeowners make and use this product to your best benefit.
