If you find you or your family to be in a situation that requires a rather large amount of money such as a home addition, new roof, paying off some credit cards, or financing a child’s college education there is one option that may sound appealing to you. HELOC, better known as home equity line of credit or home equity loan, is a rather simple topic to understand but whether or not it is the best choice for you is a slightly more complicated matter. Using your home as financial leverage can be a smart way to finance a large expenditure, such as home improvement projects or vehicles. But there are also some cons to using HELCO and this article will go into a little bit of detail about what exactly a HELCO is and pros and cons associated with one.


Commonly referred to as a “second mortgage” because homeowners use their home, their most valuable asset, to open a new loan (or line of credit). Most often, you can access up to 85% of your home’s value minus the remaining balance on your mortgage. Lenders will offer a variable interest, meaning that as the baseline interest rates go up or down, so will yours. To do this, lenders will choose an index rate (prime rate or LIBOR) and add a markup percentage based upon your credit history. Keep in mind that variable rates leave you exposed to rises in interest rates, which can be quite a bit money in the long run.

Unstable Income

The biggest red flag for people considering opening a HELCO should be if their income fluctuates and is unstable. If you do not have a steady job, are thinking of changing career paths, or there is any other reason that your financial situation would change for the worse at any point during the loan, reconsider your options. The consequence of failing to keep up with your monthly payments often is that the lender will force you out of your home and into foreclosure.



Can’t Afford an Interest Rate Increase

If you can barely afford the payments with the interest rates at the time of signing, you may not be able to afford an increase in rates because you have a HELOC with a variable rate. Unless you signed for a fixed-rate, take this into account when deciding if this is really something you can afford.

Who should consider a HELOC?

If you have a steady income and financial security, good credit history, and most importantly a great need for the money, then considering opening a HELOC is probably a reasonable idea. Home repairs and upgrades are the most common use that lenders hear when people come in asking about HELOC’s. In addition, unfortunate things sometimes happen and may require individuals to pay expensive and unexpected medical bills that a HELOC may be helpful for. All in all, a HELOC is something that should be used for needs, not wants (extravagant weddings or honeymoons).

Hopefully this overview gets you thinking about your reason for wanting to inquire more about a HELOC. To schedule a consultation or to begin applying online today, visit MMG Nova Home Loans in Phoenix.