2. Fluctuating Monthly Payments Can Cause Financial Instability

Most HELOCs have a draw period during which you can access your available credit and make small payments that are often interest-only. After the draw period ends, the loan enters the repayment phase.

Having a HELOC is similar to having an adjustable-rate mortgage in that your monthly payments can change significantly when interest rates change. It can be difficult to budget or make future financial plans when you cannot predict your monthly payments or total borrowing costs.

Of course, some borrowers are comfortable taking on this level of risk, especially in low-interest-rate environments. But if you need a lower level of risk to sleep soundly at night, a home equity loan or fixed-rate option on a HELOC may once again prove to be a better choice.

3. Interest-Only Payments Can Come Back to Haunt You

Some HELOCs have an option that allows you to make interest-only payments on the money you borrow, during the first few years of the loan. Interest-only payments seem great in the short term because they allow you to borrow a lot of money at what appears to be a low cost.

In the long run, the picture is not so rosy. Borrowers face dramatically higher monthly payments once the interest-only period expires, and possibly a balloon payment at the end of the loan term. If you don’t budget for these increases-or if your financial situation stays the same or worsens-you may not be able to afford the higher payments.

Plus, when you only pay the interest on a loan, the principal remains. The longer you wait to start paying off the principal, the longer you’ll be making debt payments. And of course, you can’t pay off your loan until you pay off the principal .

You only pay interest on what you borrow. ? ? So if your limit is $30,000, but you’ve only borrowed $10,000, you’ll pay interest on $10,000.

A low-interest HELOC can seem like a great way to consolidate high-interest debt, like credit card bills. It can even seem like a great way to refinance any debt with a higher interest rate than the HELOC rate, like a car loan.

When you extend your repayment terms from a few years to as many as 30 years, the overall cost of your debt may increase even if your interest rate is significantly lower. You’ll want to use an online debt consolidation calculator to determine whether you’ll come out ahead before considering this move.

Another problem is that, again, HELOC interest rates are variable. You might be refinancing at a lower rate now, only to have that rate increase. When the rate increases, you may no longer be coming out ahead.

Debt consolidation with a HELOC can also cause problems for people who lack financial discipline. These people tend to run up their credit card balances again after using the HELOC money to pay them off. Then, they end up having more debt than they started with, and the problem they were trying to solve grows into a larger problem.

5. Easy Money Facilitates Spending Beyond Your Means

A HELOC costs little or nothing to establish. Better yet, the annual fee to have the funds available is usually no more than $100. Furthermore, interest payments are tax-deductible under certain circumstances, just like mortgage interest. ? ? To top it off, accessing the money is as simple as writing a check or using a debit card.

HELOCs make tens of thousands of dollars readily available to you, and spending it feels just like making any other purchase. Under these conditions, it can be easy to rely on a HELOC to pay for purchases that your monthly income can’t cover.