A Home Equity Line of Credit, or HELOC, can be a very helpful financial tool for homeowners. Many use the money to make improvements, and summer is a popular time to do so. But a HELOC is not the right solution for every situation. Knowing when to say, "Yes" and when to be clear about, "No" is essential. Financial experts have some advice about how you should - and shouldn't - consider using a HELOC this summer:
Yes: To take advantage of falling rates
The latest projections show that experts believe it's likely that the Federal Reserve will cut interest rates two times later this year. If that happens, it would likely mean lower rates on consumer borrowing products, too.
On fixed-rate products — like home equity loans, for example — that rate drop won't matter much unless you wait to take your loan out until rates drop. But for those interested in HELOCs, which usually have variable rates, it can be great news. Were the Fed to reduce rates, it would likely mean the rate on your HELOC would drop, too, sending your payments down with it.
"Most HELOC rates are directly tied to the federal funds rate," says Darren Tooley, team sales manager at Union Home Mortgage. "With the Fed starting to ease rates, tapping into your home's equity for projects like home improvements, debt consolidation, or other necessary means can be very financially sound."
No: To fund a summer vacation
While it might be tempting to use a HELOC to jet-set across the world this summer, experts advise against leveraging your home for extraneous items like this. Put simply: "It carries risk," Tooley says.
"Homeowners should avoid using a HELOC for any non-essential items or expenses," Tooley says. "It won't necessarily generate a financial return and could leave you with long-term debt for a short-term indulgence."
Yes: To consolidate credit card debts
HELOCs are a common tool for consolidating debt. But in today's rate environment, they can be particularly helpful if you have lots of credit card debt.
That's because credit card rates are sitting at an average of over 21% currently. HELOCs, on the other hand, have an average rate of just over 8% — much lower than credit card rates.
In short: By using a HELOC to pay off your credit card balances, you could save a significant amount of interest in the long run. Just make sure you have a plan to pay off your HELOC, and you should ideally do so before it can rack up too much interest.
"Any time you use debt to pay off debt can be tricky," says Christina McCollum, producing market leader at Churchill Mortgage. "Be careful."
No: To build a pool
Throw this one in with summer vacations as a "non-essential" you shouldn't use HELOCs for. While a pool might be nice to cool off in when the days get hot or even make your home more valuable to your family, not all buyers will feel that way, and it could even hurt your home value in the long run.
"Building a pool for your home may not necessarily increase the value in the home and in certain markets could negatively impact you if you try to sell," Tooley says. "Some homeowners view a pool as a nuisance or unwanted financial burden."
Pools also increase your home insurance costs, as they require higher levels or different types of coverage.
Yes: To tackle that summer to-do list
If you have a long honey-do list of home repairs, maintenance tasks and maybe even renovations, a HELOC can be a good choice to help you tackle those, experts say.
For one, the Internal Revenue Service (IRS) lets you write off the interest on these loans if you use the funds to "buy, build, or substantially improve" your house. But more than this? It can also increase your home's value in the long run, meaning more profits when it's time to sell.
"Any time you use a HELOC to put money back into your home or for real estate, you can never go wrong," Tooley says.
There are a few scenarios experts place in the Maybe category. To learn more, read the full article here.
The bottom line? Before taking out a HELOC, make sure you understand the risk these products come with. Also, remember HELOCs typically have variable interest rates, so there's a good amount of uncertainty when it comes to your payments.
If that's a risk you're unwilling to take, a home equity loan could be a better option. These come with fixed rates, giving you a consistent monthly payment for your entire loan term. Talk to a loan officer if you're not sure which home equity option is best for your goals.