The Pros & Cons of a Home Equity Line of Credit (HELOC)

Home equity lines of credit seem like a great way to consolidate high interest debt into a single payment with a lower interest rate. They can be in some cases, but there are a few things you need to be aware of first.

If you’re carrying balances on credit cards and other high interest consumer debt, the thing you need to remember is that most of these types of debts are unsecured. This means that there is no collateral being put up to secure the debt, so if you default on it they can’t foreclose on your home or repossess your car.

Don’t get me wrong - they can still sue you for the money and will most likely win any lawsuit, but they can’t simply take possession of your assets.

A HELOC, on the other hand, is secured by the equity in your home. If you aren’t able to make the payments on it for some reason, the lender can start foreclosure proceedings to force you to sell your home to raise the money to repay the debt.

Consolidating unsecured debt using secured debt carries a bit of a risk. If you ever find yourself in a position where you can’t make the payments, you’re putting your assets at risk.

If you’re confident that you won’t reach that point, however, it can be a good way to lower the amount of interest you’re paying and get your debt paid off faster.

Credit cards and other consumer debt tend to have extremely high interest rates, and by consolidating it into a home equity line of credit, you can save more than 20% on the interest in some cases. If you continue to make the same payments, you’ll be putting far more towards paying off the principal and your debt will be gone much sooner.

Whatever you decide to do, make sure you discuss it with a qualified financial planner who can recommend the best option based on your particular situation. There is no “one size fits all” solution in these types of situations.

Richard McLagan has been writing about various financial topics on the internet for over 5 years. His latest website project is about home electric generators and other types of gas powered generators.