A home equity line of credit — popularly known as a HELOC — can be a great financial tool for people who have invested a large sum of money in their monthly mortgage payments but who might not have much cash left over at the end of each month. A HELOC lets you tap into your ownership share of your home to borrow money, usually at a much lower interest rate than your credit cards.
You want to be thoughtful with how you utilize your HELOC. Some purchases aren't the best option for this money. No matter what, you should avoid using your HELOC for these four instances.
1. Paying for a Wedding
Lots of people dream about the perfect wedding, and the wedding industry is big business: In 2018, the average cost of a wedding was over $33,000. Most people don't have that kind of money lying around, so opening a HELOC and using the funds to cover the wedding of your dreams may be highly tempting.
As important as your wedding day is, it's just one party. A better plan is to save money ahead of time and look for ways to keep your wedding budget manageable, and use your HELOC for an expense that will reap returns for you.
2. Buying a Car
Many people think of their car as an investment, as we use it to get to-and-from work. Buying a car isn't the same as investing in a house, however. Your home is likely to increase in value and earn you money when you sell. Your car loses over 20% of its value in the first year of ownership alone.
3. Taking a Vacation
As a general rule, it's a bad idea to borrow to live above your means. Everyone deserves a vacation, but if you can't afford a villa in Fiji, opening a HELOC doesn't change that fact. All you'll be doing is paying interest on that vacation for a long time, ultimately making it more expensive than it would be if you had paid for it in cash.
Like a wedding, a vacation is a very short-term boost to your quality of life, but you'll be paying for it for a long time. Instead of using your HELOC to cover it, plan a vacation that you can afford.
4. Investing in the Stock Market
You may have read about professional investors borrowing money to invest and walking away with millions. These things can happen, but no one can predict financial markets. They're just as likely to take a nosedive as they are to skyrocket, so using your HELOC funds to invest is incredibly risky.The risk is also true for mutual funds and any other investment product that isn't FDIC-insured. If there's a possibility that you could lose your investment and be unable to repay your HELOC, don't do it.
The Bottom Line
A HELOC is a great financial tool, but it's still a line of credit that you're responsible for paying back on time. Avoid using a HELOC to gamble on risky investments or purchase luxury goods that don't appreciate in value. These things aren't worth your home or your peace of mind. It's better to use your home equity to fund smart purchases to make the most out of your investment.
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