Home Equity Line of Credit

If you own a home and have debt, you may consider using a home equity line of credit (HELOC) to pay off your debts with a lower interest rate. Because HELOCs are secured to an asset (your home), they typically offer lower interest rates.

When you take out a HELOC, you open up a revolving line of credit from your mortgage lender where your home serves as collateral. Lenders will typically set your credit limit by taking a percent of your home's appraised value and subtracting the balance of your existing mortgage.

While a HELOC may be a great choice for some, it does have some serious consequences you should consider before applying:

• Payments can be unpredictable. Because HELOCs are variable interest lines of credit, your interest rate (and payment) will increase when federal rates increase. Interest rates rose 4 times in 2018 and are expected to continue rising through 2019.
• You put your home at risk. If you use the money from your HELOC and are unable to afford to pay it back, you could be in danger of losing your home.
• Fees and penalties. HELOCs can come with annual fees, prepayment penalties, cancellation fees, and inactivity fees. Make sure you read your agreement carefully before signing.
• Possibly the most important bullet on here. If you tap into your equity for a non-emergency, you risk not having it available for a major life event like a death or job loss.