HELOC stands for "home equity line of credit". This is a consumer credit line that is opened for the borrower using their home equity as collateral backing. In the event that the borrower fails to make payments on the credit line, the lender can sometimes foreclose on the property or obtain legal interests in the property.
Home equity credit lines tend to have higher limits and lower interest rates. The person usually uses this credit line for major purchases and financial needs, as the credit line is actually closer to a loan or second mortgage in nature. HELOC lines are best used for major purchases and important expense. HELOC abuse occurs when the borrower uses the credit line for unnecessary expenses and luxuries. It can be considered a form of mismanaging funds, and abusing the credit line may lead to foreclosure of the person’s home.
HELOC abuse can mainly be avoided through careful planning and analysis of one’s budget. Here are some tips for avoiding HELOC abuse:
- Reserve the credit line for major expenditures such as: medical emergencies, home projects, college tuition, or consolidating existing debts.
- Avoid using the credit line for daily needs and expenses such as food, clothes, gas, or hobbies, or entertainment.
- Only borrow as much as needed at the time: this can be tricky, as most HELOC lines allow the person to take out as much as they need at one time, subject to some limits. Use discretion in the amounts you take out.
- Be prepared for changing interest rates: HELOC interest rates can be variable and may fluctuate according to various factors.
- Some HELOC lines may be associated with special tax benefits. Be sure to inquire with the lender or with an attorney regarding these benefits under your state’s laws.
- Keep your home’s equity up and current: the lender may "freeze" or prevent access to your credit line if it appears that your house might be facing foreclosure soon.
- Consider alternative options before you commit to a HELOC. A home equity credit loan may be a similar arrangement that entails more fixed interest rates.
The main concern with HELOC abuse is that borrower may lose their home due to foreclosure and default issues. Some home equity credit line conflicts can be resolved through a renegotiation of the contract agreement. More serious disputes may require the assistance of an attorney and may need legal action to resolve.
HELOC abuse can cause the borrower to be in a precarious situation with their finances and with their home. However, HELOC abuse can be prevented through proper planning and through legal and financial guidance. You may wish to hire a qualified real estate lawyer if you need any advice or representation regarding home equity lines of credit. Your attorney can help you during negotiations to obtain favorable credit arrangements, and can also represent you if you need to file a claim or go to court.