Is a HELOC a Good Idea Right Now?

Question: My wife has been furloughed from her job as a hotel manager, and I own a restaurant that’s barely surviving on takeout and Uber Eats. We have somewhere around $12,000 on our credit cards and a mortgage payment due next week. I’ve been getting deluged with emails for HELOCS  – home equity lines of credit, which sounds like a second mortgage, but I honestly haven’t had time to look into it. Should I? Is this a solution or a scam?

– Tony in Oregon

Howard Dvorkin, CPA explains the risk of borrowing against equity in the current economy…

HELOCs are one kind of second mortgage, and they’re not scams. But that doesn’t mean they’re a good idea, either.

Let’s start here, Tony: Lenders aren’t bombarding you with HELOC offers because they want to give their money away. During this unprecedented economic shutdown, they’re trying to keep their business afloat just like you are.

Now let’s drill down on if and when HELOCs are a good idea right now…

What is a HELOC anyway?

HELOC stands for home equity line of credit. It’s different than a home equity loan. The latter is a lump-sum loan with your home as collateral. You usually pay it back in monthly installments, over 5-30 years. These loans are common for massive one-time expenses – like debt consolidation (which Debt.com doesn’t recommend) or even weddings (which I don’t recommend, because going into debt at the beginning of a marriage is a great way to shorten it).

A HELOC is different. It lets you borrow money against the equity you’ve built up in your home. (Equity equals the appraised value of the home minus what you owe on the mortgage.) Think of it like a credit card: You can draw from it in different amounts and repay all or some of it monthly. But if you’re not careful, missing payments could mean losing your home.

In both cases – home equity loans or lines of credit – you pay both fees and interest. Neither is something to rush into. Despite my cursory review here, they can be quite complicated, and many lenders will entice you with offers that are hard to compare.

Will a HELOC help me through this crisis?

If you’re not the kind of person with the patience to study fine print, HELOCs aren’t for you even in the best of times. That’s because you’re playing with fire. You’re using your most expensive and vital possession – your home – as collateral, which means you can lose it if you’re not careful.

And you know when people are the least careful? When they’re worried about other things and juggling problems they’ve never faced before.

Then there’s the uncertain timeline for life to return to normal. The last thing you need, Tony, is for your HELOC payments to come due before your wife returns to work and diners return to your restaurant.

A better fix

Of course, you’re probably saying to yourself, “Great, this guy is telling me what not to do. So what can I do?”

If you think in restaurant terms, a HELOC is like ordering the market-price lobster. It’s the priciest item on the menu. Why not try something just as satisfying but cheaper? In this case, you have an entire menu of options. Those include a debt management program, debt consolidation, debt settlement, and even mortgage relief, which many lenders are offering due to the extent of the crisis. (Why would lenders let you suspend your payments for up to a year? Because if you go broke, they lose a paying customer.)

Figuring out which option is best – or what combination has the most upside with the least risk – is tough to do without professional help. If you don’t call Debt.com, call somewhere like it and ask to speak to a certified financial professional. If they don’t offer you a free debt analysis, hang up and try somewhere else.

Bottom line, Tony, is to consult a professional before you make a big decision about your finances. After all, you’d consult a doctor before making a big decision about your health. This is no different.