Benefits of a Home Equity Line of Credit

When it comes to debt consolidation, there are many ways to go about making debt payments easier and focusing on payments through one source.  Research should always be taken into consideration finding out which debt consolidation methods work for an individual or family as one type may work better than another; also, the availability of receiving that type of debt consolidation will be an important factor.  For the purposes here, this article will focus on the ability to consolidate debt using a Home Equity Line of Credit (HELOC).

What is a Home Equity Line of Credit?

From Wikipedia, “a home equity line of credit (often called HELOC, pronounced Hee-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower’s equity in his/her house (akin to a second mortgage).”  Individuals that own a home or property can apply for a Home Equity Line of Credit.

How can one get a Home Equity Line of Credit?

Financial institutions such as banks are usually the common places where one can apply and determine if they can get approved for a HELOC.  The majority of HELOCs are used as a loan at a specified interest rate (normally the prime federal rate plus the bank rate) for renovations or most often to consolidate debt from high interest credit sources.

Benefits of a Home Equity Line of Credit

Getting a HELOC can help with debt consolidation provided that the individual taking out the Line of Credit uses it responsibly and for the purposes of getting out of debt once and for all.  It can also be used for other purposes such as for renovations or investing; however, one has to understand that it has to be paid back within a set time.  Before even applying for a HELOC, check to see what is the disposable household income is, check the current debt level.  The reason for this is that the equity that you get from the HELOC will be limited and if home prices depreciate in value due to a slowdown, the less equity you will receive.  Say one has debt from all sources that add up to $50,000 but the HELOC approved for is $45,000, then one will still have $5,000 owing.  Even though it is less, it is still a separate debt and the purpose of the HELOC is to consolidate all debt sources into one.  The other factor to getting a HELOC once the prerequisites are managed and thought of is to start saving for the long term.  The current problem that society is facing is that they are living paycheck to paycheck and the savings that they are making is strictly to pay off debt.  Not only will this prevent saving for ones future retirement but also consumer spending will decrease.  In these times, and in some countries, it is a good time to get a HELOC due to the rock bottom interest rates.  Since 2008 when the U.S. went through the Great Recession, interest rates went down to zero percent to avoid massive delinquencies which could of been worse if the Federal Government did not intervene.  This caused massive borrowing because of the attractive interest free or near zero loans both for businesses and individuals.  On the other hand, this also started the debt crisis where today the average family has amassed unsustainable household debt.  Again, families that do own a property and have calculated their net worth (assets minus liabilities) have to think twice and if it is right for them then to apply for a HELOC.  What this means is that unforeseeable expenses will need to be taken into account.

If you notice, I always put facts and warnings because even though HELOCs are one way of performing debt consolidation, it does not mean that it will always work.  The importance is to consolidate in order to get out of debt easier and then, from the experience of paying off the debt, to imprint into our perceived impressions the material results of not getting into debt intentionally.  Once we accomplish this, we can then be able to save on the necessary things that are a part of our lives.  If we can save without stressing ourselves then we can, by intuition, control our spending.  All these experiences will allow us to ride the waves of the upward and downward trends in the economy, interest rates and our life.  We have to be thrifty when times are tough and reward ourselves when the times are good.  Everything is cyclical; we have to be aware of the peaks and troughs to avoid being shocked and have some sort of reserve to buffer ourselves for that temporary period.  In all honesty, this will only be achieved through a new system where the monetary system will work for the society, modernize and revolutionize the financial institutions.

2 thoughts on “Benefits of a Home Equity Line of Credit”

  1. HELOC’s can work if they are used properly. The problem is people take debts that they should just pay off and they extend them out for a really long period of time on a HELOC. Many years ago, people were buying vehicles, and paying them off with a HELOC, basically putting the car loan on a 15-year term. I think HELOC’s can be a good thing, but people need to be really cautious. You may also be able to write off the interest paid on a HELOC, but that would be a question for a tax advisor. Thanks for sharing, you have a lot of good information here.

    1. Hello Steve, Kris,

      I appreciate your comments and feedback. 

      I agree with you 100% with regards to how people use HELOCs with regards to paying off the debt and extending them out for a long period.  If the debt is manageable and can be paid off within 1 or 2 years then there should be no reason to consolidate it within a HELOC.  HELOCs are meant to consolidate multiple debt sources with high interest and when it comes to a point that paying through multiple credit sources is not sustainable.  The purpose is to pay that debt and not get into that situation which really needs to be taken seriously.  We are in uncertain times as household debt is increasing by the day around the globe and governments are in the move to increase their prime lending interest rate.  We cannot stay forever with rocket bottom interest rates as this is what is causing the debt crisis.  Governments also should be careful as they do not want to increase rates dramatically or risk facing another financial crisis just like the Great Recession of 2008.  It’s a double edged sword.  This is the reason why I mentioned in the article that there needs to be a reformation of the current financial and monetary system.  HELOCs are there for homeowners but it is only a band aid solution and should be treated with the utmost responsibility.  It can work for some but not for others.  With regards to writing off the interest paid on a HELOC, it would depend on the Country, circumstances and tax rules (i.e. Business vs. Individual). 


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