A home equity line of credit (HELOC) is a variable-rate loan that is generally priced at a premium to the prime lending rate. It can take up to 20 years to mature. However, unlike most loans, a HELOC loan features monthly payments that are based on interest expense, and on top of these regular payments you can also be faced with pre-pay penalties and annual fees.
When you receive a HELOC loan, you are given a line of credit based on the equity in your home. When you have paid down the line of credit, you can actually borrow the money again, causing the loan to function much in the same way as a credit card. This can be helpful, but it can be extremely dangerous. You can find yourself using your line of credit when you do not need it or when you cannot afford it. Also, if you are not diligent in paying down your balance, you can be faced with a high balloon payment when the loan term expires.
Your Home as Collateral
Another of the major disadvantages of HELOC loans is that you are putting your home up as collateral. This creates a level of vulnerability that does not exist with most loans. Simply put, if you default on the loan, you can lose your house.
If you take on a HELOC, your interest rate will tend to be on the high end when interest rates are rising. This can make monthly payments higher. It can also make it more difficult to pay down your principal.