HELOC loans, short for a home equity line of credit, have long been a way for homeowners to get their hands on part of their home equity. However, there are problems with HELOC loans that may make you want to think twice before you sign the paperwork.
The Problem With HELOC
While a home equity line of credit may seem like an ideal solution to a financial issue, whether it’s a job loss, home repairs or renovations that need to be completed, or a kid’s college tuition that needs to be paid, the ultimate problem with HELOC loans is that they’re secured against your home. This means that if you have problems repaying the loan, the same thing that happens when you don’t pay your mortgage could happen if you don’t pay your HELOC payments.
Too Much Borrowing Led to the Financial Crisis
In conjunction with other conditions like interest rates jumping up from record lows and housing prices plummeting, lenders lending too much money to people that couldn’t comfortably afford to pay it back if anything else went wrong led to the financial crisis.
Looking back, we see how subprime mortgages played a role in the financial crisis, but we don’t see the other financial products that contributed in the news as often.
Another problem with HELOC is that people took them out when the real estate market was booming and they had lots of perceived equity built up that went belly up overnight. Their home wasn’t worth as much as the credit they used so they couldn’t even sell to get out from under the debt.
There were also products called piggy bank mortgages that essentially gave the borrower a mortgage with a built-in HELOC so they had access to equity they’d barely begun to build so that new homeowners started out upside down. Lenders gave these on the assumption that home prices would continue to rise and there would be equity to borrow against, but then the market crashed and that expected value increase didn’t happen.
HELOC Debt is Growing
As the cost of living and wages are creeping further apart, leaving many Americans struggling to make ends meet, people are using more of the credit available to them, including HELOCs.
Conditions Are Growing Ripe for HELOC Problems Similar to 2008
With the real estate market and the equity people zooming, people having high levels of equity in their homes, and the economy growing for several years in a row, many experts expect to see an economic downturn in the near future, which could leave people with high mortgage debt or high balance HELOCs in a lurch.
Can HELOC Problems Be Avoided?
Homeowners who are living on the edge can absolutely avoid getting too far in over their heads. A HELOC might help make ends meet in the meantime, but it could lead to HELOC problems should we see a sharp rise in interest rates or a decrease in housing prices. The secret is to find a way now to live within their means and avoid taking on more debt while the market is climbing to its tipping point.
Sale-Leaseback as an Alternative to HELOC
Those considering a HELOC as the only answer to their financial problems can gain access to their home equity in another way without dealing with HELOC problems. A sale-leaseback program provides a viable alternative to a HELOC. You get to convert your home equity to cash without uprooting your life and leaving your current home, and without taking on debt that may prove difficult to pay back.
If you’re considering a HELOC, it’s crucial to know the downsides as well as the positives. After informing yourself of the problems with HELOC, you feel like a HELOC might not be for you, consider a sale-leaseback solution. Consult your financial advisor to figure out what options might be best for your needs.