A home equity line of credit, or HELOC, can be a trick or a treat depending on your finances and the arrangement, says Jill Gianola, CFP and author of "The Young Couple's Guide to Growing Rich Together."
But a lot of homeowners focus only on the sweet side, she says.
The treat: "The interest rates are so low right now," Gianola says. "So it seems like a wonderful way to borrow money. They can dip in when they want and out when they want, and all they have to pay is the interest."
The tricks:
- Most HELOCs have variable rates. "When the interest rates go up, they can go up significantly."
- Banks can cut or eliminate available credit at any time in response to decreasing home values or changed personal circumstances (such as job loss), Gianola says.
- After 10 years, you have to start repaying what you borrowed. When you sell the home, the HELOC must be repaid immediately.
One alternative is to get a fixed-rate cash-out refinance. "A home equity line can be a very good thing," says Gianola. "Just be aware of the potential gotchas."