Be careful not to maximize your HELOC debt!

November 1, 2019

When assessing your total debt, add up your total debt: credit cards, business loans co-signed on a personal basis and any other loans, including a Home Equity Line of Credit (HELOC) if you carry this liability. Once you have added your combined debt, subtract this from all of your retirement and your non-retirement assets.

Many consumers are shifting unsecured high-interest credit card balances to a low-interest Home Equity Line of Credit (HELOC). This may be established while setting up a home equity line of credit in lieu of a regular mortgage, though it is secured by your home. This can also happen when people consolidate all their debts while backing it with their home value. Consider the pros and cons when assessing HELOC debt.

Once this money is secured by your home, it is no longer unsecured debt in your portfolio. Adding in your HELOC debt with your portfolio of debt gives you a proportional insight into your net worth. Weigh your HELOC level of debt alongside your unsecured credit cards.   Compare interest rates, fees, and other features; and the time it will take to pay these loans all off (some calculators do a great job at comparing this).

It is true that you may be able to save a sizeable chunk of interest by transferring debt from a high-interest credit card to a low-interest HELOC. For many, this works well insofar as they have an intelligent debt repayment plan in place.

Avoid using HELOC debt as quick loans for vacations, 2nd residences, businesses, or investments. Beware also of using HELOC credit cards offered with most lines of credit.

This growing shift to HELOC debt helps the balance sheets of the lenders because this debt, once transferred, becomes secured collateral with everyone’s real estate. Think seriously about reducing your debt portfolio especially if you hold a lot of HELOC debt.

Many people are inadvertently reducing their home equity in the process of securing once unsecured credit card debt balances while hinging it to, and reducing their home value. When people sell their homes they are often surprised that their home equity is vastly reduced after they pay off their mortgage and the associated HELOC debt which must also be paid off during the sale.

Consider talking to a mortgage specialist to see how you can assess your HELOC debt and plan to maximize your home debt to better serve you.

Source: Bank of Canada

 

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