Thirty Percent of Homeowners Are Unable to Correctly Identify A HELOC. Here's Why Awareness Matters

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Thirty percent of homeowners who bought a house in the last ten years were unable to correctly identify a home equity line of credit, according to a TD Bank survey. Thirty-four percent also couldn't define what a home equity loan is.

This is concerning because, according to the survey, 74% plan to stay in their current home over the next two years, and 58% say their current interest rate is influencing that decision. "As a result, we are seeing an increasing number of individuals leveraging their home equity as a means to enhance their financial position," said Steve Kaminski, head of residential lending at TD Bank.

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If approximately one-third of homeowners can't even correctly identify a HELOC or home equity loan, they're likely signing on the dotted line without understanding how the product works, what the risks are or whether it fits their long-term goals.

What a HELOC actually is

Put simply, a home equity line of credit is a revolving credit product secured by your home. It's different from your mortgage in that you borrow against the equity you've built in your property, typically with the flexibility to draw funds as needed.

Because it's secured by your home, it comes with risks, like possible foreclosure, and charges you should understand. If you don't know how a HELOC works, you might not realize how your monthly payments could change, how the lender treats interest and principal or how tapping this equity fits into your overall financial strategy.

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Risks of Taking Out An HELOC

Before taking out an HELOC, make sure you fully understand the associated risks and responsibilities, including the following:

Your rate and payment can change. Most HELOCs have variable interest rates, which means your monthly payment could rise if rates go up. Your home is on the line. Since your property is the collateral, missing payments can put your home at risk of foreclosure. So make sure to only borrow what you can comfortably repay. It's easy to overspend. Because a HELOC functions like a revolving line of credit, it can be tempting to treat it like free money. It reduces your home equity. Tapping your equity reduces the home equity you've built up. And if you're not careful, you could end up owing more than your home is worth. This is known as being underwater on your home. Repayment can sneak up on you. Once the draw period ends, you'll need to start repaying both principal and interest, which can cause a noticeable jump in your monthly bill.

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This article Thirty Percent of Homeowners Are Unable to Correctly Identify A HELOC. Here's Why Awareness Matters originally appeared on Benzinga.com

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