The Globe and Mail recently published an article talking about home equity lines of credit, and the pitfalls that many homeowners can run into when using them as a borrowing tool. In the article Stephanie Holmes-Winston, president of The Money Finder talked about the mistakes she sees homeowners continually making with HELOCs; and how those mistakes only lead to further debt that are too much to handle. Here are the highlights of that article, and how you can avoid making those same mistakes if you currently have a HELOC, or if you’re thinking about getting one any time soon.
Don’t use your line of credit like an ATM or a credit card
As Ms. Holmes-Winston points out, many people think of HELOCs as another debit card, taking out small amounts whenever they need money for the weekend or want to pick up dinner on the way home. We’re even guilty of referring to HELOCs as “like a credit card” on this blog. But this is in fact, a mistake. In fact, a line of credit is a 2nd mortgage on your home, and you should treat it as such. Think of it like a mortgage (because it is) and every time you want to pull from it, ask yourself whether you’d tack that much extra onto your first mortgage. It’ll change the way you think about them, and change the way you spend them.
Once you pay down your HELOC, keep it paid down
Even if you’re diligent about paying off your line of credit, continue being diligent about it. It really does you no good to pay off $10,000 on your credit line, only to run it back up a few months later and need to repay it again.
When it comes to interest rates, round up
This is simply a case of hoping for the best while preparing for the worst. Yes, interest rates are incredibly low right now, but lines of credit work on a variable interest rate. If you calculate the amount you can afford to pay now on the current 3% on your HELOC, and the rates go up even 2%, that will be a huge jump in how much you ultimately pay; and your original calculations will be a moot point because your debt is no longer based on those figures. When calculating whether or not you can actually afford your line of credit, double the interest rate as it stands when you get it. That way, the worst case scenario will be that you’ve allowed too much of a cushion for the rate, and you actually have money left over for your savings (or to pay off that line of credit.)
