Property Exposure

• The single greatest precaution you should take when getting a HELOC involves realizing that your property is exposed to further risk of foreclosure if you fail to meet repayment obligations. HELOCs are secured loans with your home as collateral. This gives you advantages including lower interest rates, but it also adds to the debt against your property already taken on with your first mortgage. If you are on a tight budget, you might consider insurance against the loan should you lose your job and have difficulty making payments.
  
  

Fees

• Prepay penalties and annual fees are two common fees associated with HELOCs that you need to know about before getting a line of credit, according to BankLady (see Reference section). Not all banks charge these fees. Prepay penalties are sometimes hefty charges applied if you pay down your loan balance ahead of its expiration. Many banks charge annual fees for maintaining the line of credit, often around $50 or $75. You can sometimes get these waived if you hold your first mortgage with the same bank or have other large accounts.
  
  

Expensive Interest

• HELOCs are highly appealing because interest rates are usually lower than unsecured credit. However, HELOCs often begin with an interest-only required monthly payment during the draw period, often 10 years. This is the initial time frame during which you can draw on the loan balance. Interest-only payments make for low monthly debt obligations, but your interest adds up over time if you are never paying on the balance, as noted by BankLady. Plus, once the draw period is over, you usually have to amortize the remainder of the balance and pay it off within a relatively short period -- typically five to 10 years.
  
  

Debt Consolidation

• Debt consolidation is a common use of HELOCs. This is using home equity to consolidate loans from other higher-interest-rate personal debt and credit cards. On paper, this is a fairly sensible move to reduce the number of creditors you owe, along with your monthly payments and your interest expenses. However, the problem with debt consolidation using a HELOC is that you have to develop new spending habits. Otherwise, homeowners tend to borrow and spend, and simply build the credit balances on their personal loans and cards back up. This can lead to an extremely overwhelming debt situation.