Home Loans: Tips to use HELOC for refinancing

Home Equity Lines of Credit serves as a pipeline of financial hope for home owners. Home Owners literally love this home loans.The major benefit being that the borrower only pays the interest for only the part which he uses of the approved HELOC. HELOC is a financial instrument to use that extra equity, the home has generated due to the increased worth of the home in the reality market. But, more often than not, home owners misuse this line of credit for purposes other than reducing the first mortgage used to buy the property. In that case HELOC is more a honey trap than a rescue team.

A Honey Trap

Home owners apply for HELOC to use the funds to reduce the first home loan, but end up using that for paying off a student loan, a car loan, or credit card debt. Various circumstances force home owners do it. But, it is imperative to see the prudence of such an action. A student loan is the type of loan, people can’t escape. You cannot refinance a student loan, nor does interest modification have much effect. If HELOC is to be used, the best bet probably would be to pay off the student loan. Paying off a car loan with line of credit is not sensible, because if you cannot afford the car, you can always sell it, to pay off the remaining debt with some help. But, you cannot sell your student loan. Using line of credit to pay off credit card debt is really ridiculous.

Credit card companies don’t mind if the borrowers have debt, they only panic when even the last ray of hope, in the form of line of credit has vanished. Not using HELOC to pay off the first home loans, means, and the borrower is going to file for either a foreclosure or eventually bankruptcy. So it’s important to prioritize the utilization of the line of credit, if spending it on other purposes is the only way to keep your head above the water

Temptation

When people have money on their hands, they go berserk buying off unwanted things like paintings, pottery, luxury clothes, portable swimming pools, snooker tables etc. Line of credit tempts people into buying stuff, they don’t really need. Slowly they amass a garage full of liabilities having no resell value. What return a costly set of golf clubs would provide in times of need? The answer is none, and most of the other items people buy can be applied with the same logic. Line of credit becomes more trouble than help, because it gives people money. They create more sinks than sources, getting into further debt.

Double Jeopardy

Slowly the debt builds up, and home loan borrowers have trouble paying off their monthly installments. They take a second mortgage to refinance the first one. As long as good, but when the reality market goes kaput, and the worth of the home dwindle, they owe a mortgage greater than the appraised worth of the home. Line of credit would have provided the oxygen now, but it has already been used up. This is where the borrowers are in big trouble. All that happens is not due to the lack of funds, but due to presence of it.