Question:

What are the major disadvantages of home equity line of credit (HELOC) mortgage?

Answer:

The greatest disadvantage of a home equity line of credit (HELOC) mortgage is the way its interest rate is tied to the prime rate. HELOC rates adjust every time a change in the prime rate occurs, on the first day of the month after that change. Although the prime rate might change only several times in the year, a home equity line of credit borrower will be still more vulnerable to those changes than a traditional ARM borrower.

Home Equity Line of Credit (HELOC) Mortgage Risks

HELOCs are ARMs in essence. However, HELOCs don't have the usual adjustment cap. And while an ARM lifetime cap may carry 5 or 6 percent over the original rate, a HELOC may reach 16 or 18 percent if rates are inflating.

However, there are currently HELOCs advertised with monthly or quarterly adjustment. Also, there are fixed-rate HELOCs but those are essentially standard fixed-rate loans and you can still suffer from high monthly payment, if mortgage was signed during inflated rates.

It is possible to switch from an adjustable rate HELOC to a fixed rate loan. However a penalty will be probably charged on you.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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