The Dangers of HELOC Loans

Be Aware of Heloc Advantages and Disadvantages
It is important to research your options before taking out a line of credit for a mortgage in the Albuquerque area because there are some significant disadvantages to Home Equity Lines of Credit (HELOC) mortgage loans. 

A HELOC loan differs in several potentially costly ways from a traditional home equity or refinancing loan. This is because a HELOC mortgage is a line of credit secured against the equity of your house while a Fixed Home Equity Loan is not a line of credit. A Fixed Home Equity Loan is a fixed term, fixed rate, fixed payment loan.

Here are some of the dangers of choosing a HELOC loan:

Foreclosure

The equity of your home is pledged as collateral when you take out a HELOC loan. If something happens and you can no longer make payments on the mortgage loan, the lender can foreclose on your home. To make matters worse, after your home has been foreclosed, you will probably still be held responsible for the balance of the HELOC loan.

Home value

If the value of your home decreases at some point while you have a HELOC loan, the balance on that loan could be greater than the value of the home or negative equity.

Termination fee

Terminating your HELOC loan before the due date could lead to a fee. The majority of HELOC loans contain a clause that states you will owe a fee for paying off the loan before a set time has passed. This period of time can be up to 5 years but is usually about 3 years. The fee itself can be a $100, or as much as 3% of the original HELOC mortgage amount.

Annual fees

As long as your HELOC account is open, you will probably incur an annual fee, even if you do not have a balance on your account. If the HELOC loan stays open with a zero balance, the bank may access a non-usage fee to make up for a lack of interest on the balance. This fee could amount to several hundred dollars! These types of fees are not possible on a fixed home equity loan because it is not a line of credit.

Variable rate

Interest rates on HELOC loans are usually variable—which means your rate can go up and increase your monthly payments. HELOC mortgages have no caps on rates so it could increase over time with no end in sight.