Many consumers ask themselves, what is the equity in their home, and can they use it to pay their bills? They can with a home equity line of credit or HELOC.
However, while it may be tempting to use your HELOC in the same way that you would use a credit card, be careful. There are lots of smart ways to use an HELOC, but there are also expenses that you should avoid paying for with your HELOC.
Here are five expenses that shouldn’t be covered using an HELOC.
1. Travel and Lifestyle
Travel can be wonderful. Being able to pay for a wedding for a child or a golden anniversary party for your parents can be a wonderful gift, but, while it may be tempting to take out a home equity line of credit to pay for them, be careful
If you can’t plan a vacation or a party while living within your existing budget, it may be a sign that you need to look for more affordable options.
2. Buying a Car
Depending on your credit, the interest for an auto loan may exceed that of a home equity line of credit.
It may be tempting to use the credit to finance your next auto purchase, but actually, the auto loan is the better choice despite a higher interest rate.
First, the auto loan is secured by the vehicle, not your home. If you can’t make your auto loan payments, the worst-case scenario is that you lose your car. The worst case for not paying the home equity line of credit is that you could lose your home.
If you need to borrow against your home to afford a new car, you may want to consider a more affordable option.
3. Paying for College
We all want our children to benefit from a good education, but taking out a home equity line of credit to help pay for it isn’t the best idea.
While student loans can be expensive, they are still structured as an installment loan with fixed payments.
Also, if you’re reaching retirement age, using an HELOC to pay for college locks up the equity in your home that you might need to finance your retirement or future improvements to improve the equity in your home.
While it may not be easy for your kids, it’s better for them to take out student loans now and pay them back over time. You can always give them a gift later to help them make the payments.
4. Paying Off Your Credit Card Debt
It’s tempting to take advantage of an HELOC to pay our credit cards. After all, the interest rate is lower, and you can consolidate multiple credit card payments into one easy payment.
However, before you put your home equity at risk, it’s important that you ask yourself how you got into credit card debt in the first place. If it’s because you have a hard time sticking to your budget, using your home equity line of credit to consolidate credit cards could be a bad idea.
If you continue to live outside your means or don’t address the fundamental issues related to how you manage your debt, you may find yourself in the exact same position in a few years, without the equity in your home. Remember, if you can’t repay your home equity line of credit, the bank can foreclose on your home.
Instead, a Debt Management Plan may be a better option. It will allow you to lower interest rates, consolidate payments a
5. Speculating
Investing in a new business, the stock market, or an investment property may seem like a good idea. But be careful.
Even in the best of circumstances, these types of investments can be volatile. Unless you can maintain the investment in the long run and weather the occasional market downturn, you don’t want to risk the stability of your investment in your home for something that may not pay off in the long run.
Talk to an Expert
Before making any decisions regarding your home equity, talk to us.
DebtHelper.com’s HUD approved counselors can serve as an impartial guide to help you make the best decision for you and your home. Ready to get started? Schedule a free counseling session today or call us at 800-920-2262.
