'HELOC Creep' Means You're Going to Waste Your Great Home Equity

NEW YORK (MainStreet) — For want of an official term, call it "HELOC creep."

That's when a homeowner takes out a home equity line of credit for one purpose, then uses it for something else.

It's not necessarily a bad thing — not if the new purpose is really justified. But the practice can also mean that discipline flies out the window when a nice pile of cash is sitting around. On a psychological level, the decision to borrow may be more carefully considered than the decision to spend — a possibility worth keeping in mind whenever you decide to take on more debt.

HELOC creep is revealed in a study by TD Bank, which queried 1,350 homeowners on their HELOC use. Though the bank doesn't use the term, it's findings show "HELOC creep" in action.

Of those surveyed, 27% used the loan to buy a new car, though only 21% said that had been their intent when they took out the loan. HELOCs were used for emergencies by 24%, though just 19% had intended to. And 18% used the funds for health care, while just 14% had planned it that way.

While these gaps are not enormous, they do raise a question about borrowers' judgment. What, exactly, do they consider to be an emergency? Is the new car really a necessity, or is the HELOC used to buy a more expensive vehicle than needed?

To be fair, some difference between the borrower's initial intention and eventual spending is due to the nature of home equity lines of credit. Unlike a mortgage or home equity installment loan, which come as lump sum, the HELOC operates something like a credit card, allowing homeowners to borrow only what they want when they want, up to the credit limit. Over time, the borrower's needs may change.

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