By: Gaurav Bhola, MSM, Managing EditorHome equity line of credit (HELOC) can be a great tool to access cash in a hurry. However, a home equity line can also be used improperly:
1. Never use HELOCs to Invest
It is never a good idea to borrow money to invest in the stock market. Many people took out home equity lines of credit in the mid 1990s till 2005 as if they were going out of style. The cost to borrow money was so low during the housing boom that people used HELOCs for several things for which it was never intended. One of the major misuses of lines of credits during the late '90s was using the borrowed funds to invest in the stock market. As the tech bubble burst so did many people's life savings. Several HELOC borrowers were unable to payback their loans.
Never borrow money to invest in the stocks.
2. Tax Deduction Benefit
Home equity lines shouldn't be used solely for tax deductions. It is a bad idea and a bad return on your investment. Imagine giving someone a dollar in order to get 30 percent or 25 percent of it back. Does that make sense? The use of a HELOC in order to get a tax deduction is not advisable.
3. Debt Consolidation Unaccompanied by New Financial Discipline
Using your home equity to perform debt consolidation is a good idea, if that also entails a new commitment from you to start fiscal discipline. Financial discipline is the key to staying off debt permanently. One of the most common reasons homeowners get a HELOC is to take care of credit card debt, so that they can avoid credit counseling or credit consolidation services.
4. Buying Toys
Don't use the HELOC to buy a car, boat, or some other toys. This is no way to build your wealth. Instead save your money and then get your toy.
5. Extravagant Home Renovations
A home equity line of credit is a second mortgage. At one time in our country, a second mortgage came attached with a stigma. If people sought out second mortgages, they were seen in a negative light. But now the stigma is no longer there, as such, HELOCs are used for extravagant home remodeling and renovation. It is simply way to live beyond you means.
Home equity lines of credit can be great tools if used properly with financial discipline.
