8 Ways a HELOC Could Really Hurt Your Finances

NEWS & TRENDING - MORTGAGE & LOANS NEWS
Don’t gloss over the risks tied to taking out a HELOC.
Updated May 16, 2024
Fact checked
couple financial planning in a kitchen

We receive compensation from the products and services mentioned in this story, but the opinions are the author's own. Compensation may impact where offers appear. We have not included all available products or offers. Learn more about how we make money and our editorial policies.

A home equity line of credit (HELOC) might seem like a good idea if you're a homeowner who to make extra cash. However, you should be aware of some risks when applying for a HELOC.

Since this is your home on the line, it's important to walk into the transaction with your eyes wide open. We'll explore some of the ways a HELOC could hurt your financial situation.

If you’re over 50, take advantage of massive discounts and financial resources

Over 50? Join AARP today — because if you’re not a member you could be missing out on huge perks. When you start your membership today, you can get discounts on things like travel, meal deliveries, eyeglasses, prescriptions that aren’t covered by insurance and more.

How to become a member today:

  • Go here, select your free gift, and click “Join Today”
  • Create your account (important!) by answering a few simple questions
  • Start enjoying your discounts and perks!

Important: Start your membership by creating an account here and filling in all of the information (Do not skip this step!) Doing so will allow you to take up 25% off your AARP membership, making it just $12 per year with auto-renewal.

Become an AARP member now

Your home is at risk

เลิศลักษณ์ ทิพชัย/Adobe angry freelance woman confused

When you take out a HELOC, the line of credit is secured by your home equity. If you aren’t able to keep up with the monthly payments on your HELOC, the lender could foreclose on your home.

Of course, losing your home is a worst-case scenario. But it’s important not to stretch your budget too far when leaning on a HELOC.

Your credit score can take a hit

Song_about_summer/Adobe credit score on computer screen

When you open a new line of credit, your credit score tends to drop by a few points. Making late payments to your HELOC or choosing to use a large portion of your credit line could also lower your credit score.

On the flip side, making on-time monthly payments on your HELOC can improve your credit score. A HELOC can actually help your credit score in the long run if you use it responsibly.

You face upfront costs

Drazen/Adobe couple going through financial reports

Most HELOCs come with closing costs, which might include a home appraisal and origination fees. If you don’t factor in closing costs, these expenses could make the loan surprisingly expensive.

Resolve $10,000 or more of your debt

Credit card debt is suffocating. It constantly weighs on your mind and controls every choice you make. You can end up emotionally and even physically drained from it. And even though you make regular payments, it feels like you can never make any progress because of the interest.

National Debt Relief could help you resolve your credit card debt with an affordable plan that works for you. Just tell them your situation, then find out your debt relief options.1

How to get National Debt Relief to help you resolve your debt: Sign up for a free debt assessment here. (Do not skip this step!) By signing up for a free assessment, National Debt Relief can assist you in settling your debt, but only if you schedule the assessment.

Try it

The interest rate may increase

Sutthiphong/Adobe interest rate and dividend concept

HELOCs usually have variable interest rates, which means the interest rate can change over time. Since the interest rate can rise and fall, a rising rate can make it more expensive to carry the debt.

The good news is that most HELOCs have a maximum rate attached. But if the maximum interest rate is 25%, that leaves a lot of room for your interest rate to climb.

If you are using the HELOC to pay off your debts, a rising interest rate could make this move more expensive than you originally expected.

A fluctuating monthly payment can wreak havoc on your budget

Monkey Business/Adobe retired couple with household bills

As the interest rate of your HELOC rises and falls, your monthly payment will change with it. Unfortunately, a changing monthly payment may make it difficult to manage your monthly budget.

If you have a tight budget, a rising HELOC payment could put significant pressure on your finances. For homeowners who want to tap into equity with a fixed monthly payment, consider a home equity loan instead.

Sticking to interest-only payments might hurt later

Rido/Adobe couple examining home finance

HELOCs typically have two periods: a draw period and a repayment period. During the draw period, you can tap into the funds when you need them. 

Along the way, the lender might allow you to make interest-only payments. But when the draw period ends, you’ll be expected to repay the principal and interest.

The ability to make interest-only payments might give you some breathing room in your budget upfront. But when you hit the repayment phase, you might regret the decision because you’ll be facing a larger monthly payment. 

Depending on your situation, the large payment could impact your budget in a big way.

Easy to spend more than you should

Tijana/Adobe young couple calculating expenses

A HELOC gives you the ability to tap a line of credit on an as-needed basis. While the flexibility of a HELOC might be good for some, it can act as a source of temptation for others. After all, it’s easier to overspend if you have easy access to the funds.

Evaluate your own spending habits before taking out a HELOC. If you aren’t sure that an open-ended line of credit is a good idea, consider a home equity loan instead.

Your home’s value could fall

bnenin/Adobe couple doing finances

Although you might expect your home’s value to rise, the reality is that it could fall. If your home value declines, you could end up owing more than your home is worth.

For example, if your home mortgage balance is $200,000 and your HELOC balance is $30,000, you owe $230,000 in total. If your home value drops from $280,000 to $200,000, then you suddenly owe more than the home is worth.

When you want to sell your devalued home, the lenders expect you to pay off the mortgage and the outstanding HELOC. Coming up with tens of thousands of dollars could be a financial disaster.

Bottom line

goodluz/Adobe family meeting real-estate agent

A HELOC offers one way to borrow against the value of your home. But when you put your home on the line, there are risks to your financial health that you can’t afford to ignore.

If you need cash, you might explore other options, such as home equity loans and personal loans.

Choice Home Warranty Benefits

  • First month free
  • Protection for unexpected expense
  • 24/7 claims hotline
  • Network of over 15,000 technicians

Author Details

Sarah Sharkey Sarah Sharkey is a personal finance writer who enjoys diving into the details to help readers make more informed decisions. She covers mortgages, insurance, money management, travel, and more.

Want to learn how to make an extra $200?

Get proven ways to earn extra cash from your phone, computer, & more with Extra.

You will receive emails from FinanceBuzz.com. Unsubscribe at any time. Privacy Policy

  • Vetted side hustles
  • Exclusive offers to save money daily
  • Expert tips to help manage and escape debt