Financial Counseling Certification Program (FiCEP) Practice Exam

Which statement regarding the use of a Home Equity Line of Credit (HELOC) is true for members refinancing debt?

1. Members should be encouraged to use a HELOC

2. Members should avoid using a HELOC

3. HELOCs are recommended for all refinancing scenarios

4. HELOCs are only beneficial for new homeowners

The correct answer is: Members should avoid using a HELOC

Refinancing debt typically involves consolidating high-interest debt into a lower-interest alternative to reduce monthly payments or overall interest costs. A Home Equity Line of Credit (HELOC) can indeed serve this purpose, but it's essential to exercise caution. Using a HELOC to refinance debt can be risky because it leverages the equity in a home, turning unsecured debt into secured debt. If members encounter financial difficulties, they may face the possibility of losing their home since failure to repay the HELOC can lead to foreclosure. Additionally, HELOC interest rates can be variable, making it challenging to predict future payments and budget accordingly. Considering these risks, a cautious approach may often be advisable, leading to the recommendation for members to avoid using a HELOC for refinancing debt unless they have a clear plan and the financial discipline to manage the associated risks.