4 HELOC mistakes to avoid this July

There are costly mistakes homeowners should avoid making when borrowing with a HELOC this July. Getty Images/iStockphoto

Home equity borrowing is one of the more effective ways to fund large expenses and pay for specific home projects, especially in the unique interest rate climate of recent years. Interest rates on home equity lines of credit (HELOCs), specifically, are down by more than 1.5 percentage points from their position last September. And with a variable rate, they're well-positioned to become even cheaper in the weeks and months ahead. Combined with the average home equity amount of more than $300,000 now, a HELOC offers homeowners a cost-effective way to access large amounts of money this month.

But a HELOC isn't perfect, either. To boost their chances of success with this unique tool, homeowners will need to be smart and judicious in their approach. And that extends to knowing some critical (and expensive) HELOC mistakes to avoid making this July. Below, we'll examine four of them.

Start by seeing how much equity you could borrow with a HELOC here.

4 HELOC mistakes to avoid this July

Don't apply for a HELOC before first reviewing (and having a plan to avoid) these four timely mistakes:

Not monitoring the rate climate

HELOC interest rates change daily, sometimes by substantial margins. You won't know this, however, without paying close attention to the interest rate climate now. Fortunately, it's easy to do so with online marketplace websites that list a series of rate offers and lenders all in one place. This allows you to compare rates, loan amounts, fees, repayment structures and more. By doing so, you'll be better able to determine which rate offers are truly advantageous and which just appear to be. So don't avoid the interest rate climate. An informed approach to your home equity borrowing journey is more likely to be an affordable one.

Compare your current HELOC rate offers here to learn more.

Assuming rates will mirror Fed rate actions

HELOC interest rates are largely driven by Fed rate actions, among other factors. And cuts to the federal funds rate will generally lead to lower HELOC interest rates, but it won't be a direct relationship. In other words, assuming rates will mirror Fed rate cuts the week they're potentially issued this July or, more likely, in September, is a mistake worth avoiding. Many lenders will preemptively lower their rates for borrowers in anticipation of a Fed rate cut. So, you may not have to wait too much longer to get a below-average HELOC rate.

Overborrowing with rates lower than alternatives

The average HELOC interest rate is now 8.27%, meaning that borrowers with good credit scores may be eligible for an even lower rate. That's significantly lower than what's available with personal loans (around 12% this July) and credit cards (around 21%). But with the home in question serving as collateral, homeowners should avoid the temptation to overborrow now, even if the rates they'll have to pay are much lower than the alternatives. Failure to make repayments as agreed to, after all, could lead to foreclosure on the property.

Using it for timely reasons instead of strategic ones

With rates on HELOCs relatively low now and the ease of using it like a credit card, it may be tempting to use it for timely expenses this summer. Paying for a vacation, for example, may seem like a good idea on paper, but it likely is not the way to use money sourced from your most prized financial asset. Instead, use it for strategic purposes, like select home renovations that could net you a sizable tax deduction next year. Or, just keep it as a potential emergency fund (you only need to make payments on the amount utilized, not the full credit line you've been approved for). Not sure which way to use a HELOC this summer? Consider speaking to a financial advisor or lender who can help guide you.

Chat with a home equity lender here today.

The bottom line

A HELOC can be a cost-effective solution to your borrowing needs this July. To make it so, however, it's important to clearly understand – and avoid making – the above four mistakes. By taking an informed and strategic approach, not only will you improve your chances of HELOC success this month, but you'll better position yourself for long-term success, too.