Pros And Cons Of HELOC When You're In A Financial Bind

When you have a sudden expense come up and don't have the funds to cover it, one option you may consider is taking out a home equity line of credit, or HELOC. This is a loan against the equity in your home. Essentially, the lender will give you the funds, using equity in your home as collateral. (Sometimes a HELOC is called a second mortgage because it's essentially lending you back money you have already paid into your mortgage.) While taking out a HELOC is a good choice in some situations, it's not always the right choice. Consider these pros and cons before taking out this type of loan.

Pro: A HELOC is easy to obtain.

Taking out an unsecured personal loan can be difficult; the lender may not approve the loan if you don't have great credit or a high income. However, as long as you have equity in your home, you're almost certain to be approved for a HELOC. There's not much risk for the lender since you're using your home as collateral. 

Pro: Interest on the loan is tax deductible.

Since a HELOC is technically considered a type of mortgage loan, any interest that you pay on the loan will be deductible on your federal tax return. So you may save money with a HELOC compared to what you would pay on a conventional, personal loan or a credit card. 

Pro: HELOCs can be taken out over long loan terms.

If you were to take out a personal loan, the lender would typically require that it be paid back over a period of 5 years -- maybe 10 if you have great credit. HELOCs can often be taken out over a longer term, since they're considered mortgages. So you can borrow funds and pay them back over 20 or 30 years if this is what you'd prefer to do.

Con: HELOCs often have higher interest rates.

In exchange for the convenience of a HELOC, you'll often pay a higher interest rate than you would on a personal loan. Of course, if you are not eligible for a personal loan, a HELOC may be your only option -- and the rates are usually still much lower than if you were to put the expenses on a credit card.

Con: If you don't pay, your home can be seized.

Using your home as collateral may be dangerous if there's a chance you will not be able to pay back the home. If you default, the lender has the right to repossess your home.

To learn more, contact a company like Rio Grande Credit Union.