A home equity line of credit (HELOC) is a flexible loan product that provides you with a line of credit you can borrow against as needed. Used correctly, a HELOC can be an affordable option for funding home improvements, repairs, emergency expenses, and pretty much anything else you need to finance. Below are some pitfalls to avoid so that you get the most out of a HELOC.

1. Borrowing too much. The convenience of a HELOC is that you can borrow against the line of credit when you need to, but you don’t have to borrow more than you require. This can keep your interest lower than it might be if you borrowed a lump sum. The thing is, that convenience can be enthralling. Before you know it, you may find yourself borrowing more than you can really afford or actually need to be utilizing. Even if you are approved for a high limit, you should always carefully go over your budget and figure out what you can actually afford to pay back on time.
2. Lacking awareness of variable interest rates. HELOCs can carry fixed or adjustable interest rates. With a fixed rate, your HELOC’s interest rate will stay the same for as long as you have it. But with a variable interest rate, the rate can go up or down in the future. Often, the rate fluctuates based on the prime rate index. Homeowners who get a HELOC without being aware of this fact can dramatically underestimate what they will be paying in interest. Before you borrow against your HELOC, calculate what you could owe if interest rates go up, and/or make sure you can pay it off again before that happens.
3. Budgeting incorrectly for the long term. The first years of a HELOC are called the “draw period.” This period usually lasts somewhere between 5 and 10 years. During the draw period, you only have to make interest payments. As a result, a HELOC can feel quite inexpensive for a long time. But after the draw period is over, you enter a repayment period. At that point, you have to start repaying the principal, not only the interest. Before you borrow against your HELOC, you need to think carefully about your repayment schedule and what it will entail. Only utilize HELOC funds if you can afford to pay back the interest and the principal on the required schedule. You also can pay off the balance early if you prefer. For smaller purchases, this might be the best option.
4. Not checking for fees and penalties. Interest is one cost of a HELOC, but there can be others that are easy to overlook. These include initial maintenance fees, per-draw fees, inactivity fees, and penalties for early account closure. So, check the fine print before you take out a HELOC. Know what actions (or inactions) could result in fees or penalties, and then make sure you avoid those things.
5. Using a HELOC in place of financial stability. You can theoretically use a HELOC to fund just about anything. But that does not mean that you should. A HELOC makes sense when you have a specific purpose that will create some kind of long-term improvement in your life. Examples include consolidating your high interest debts, making a home repair, etc. What a HELOC should not be used for are your regular, ongoing costs of living. You should not use a HELOC to pay for gas, groceries, utility bills, and so forth. If you are leaning on a HELOC to pay these costs, you are not living in a financially sustainable way. Sooner or later, that is going to catch up with you. If you find yourself in this situation, you will need to find another way to resolve your budgeting issues, either by lowering your bills, or increasing your income.
6. Not knowing how fluctuating home values can impact a HELOC. When you get a HELOC, it lets you borrow against your home equity, and your home itself acts as collateral for the line of credit. The value of your home will not remains static over the years, however. It will fluctuate with the local housing market. It can go up or down.

We tend to think of home values rising, because over the long term, they generally do. But that isn’t always what happens. Sometimes a home may drop in value, whether temporarily or over the long term. If it does, you can find yourself in a situation where what you owe on the HELOC exceeds the value of your home. At that point, you are probably going to face a loss, whether you try to sell or refinance.

Try not to borrow against the full amount of your equity. That can help you to avoid being stuck up a creek without a paddle in a scenario where your home value drops.

Apply for a HELOC in Chicago or Beyond

Used correctly and responsibly, a HELOC can be an affordable source of financing for a wide range of purposes, directly related to your home or otherwise.

MidAmerica Bancorp can help you apply for a HELOC in the Chicagoland area or throughout Illinois. We also work with homebuyers and homeowners in FL, IN, MI, TN

and WI. To get started, please give us a call at (708) 237-4052 to schedule your consultation.