subject: Home Equity Line Of Credit: Do You Really Want One? [print this page] If you own your home you have a financial resource available to you that can help you with your financial needs or concerns. What is it? HOME EQUITY!
Equity is the value of your home minus the remaining mortgage balance which is outstanding. While you live, eat and sleep in your home worrying about debts or wishing you could refurnish the living room you may be sitting on the cash that will grant your wishes.
Why Would You Want an Equity Line of Credit?
With a typical loan, which deposits a set amount of money in your account and begins charging you interest and payments at a fixed rate until repaid, a line of credit acts sort of like a credit card account. You do not need to pay interest on the full amount you have access to -- only on the amount you have used.
Using an equity line of credit (also known as a HELOC) gives you greater flexibility with the least cost. Not only can you access the credit only as you need it,your monthly payments will reflect only the balanced used. Some lines of credit have only the interest as the minimum payment which can be helpful when finances are tight.
A HELOC is a great his if you don't want to spend a large amount in one place..as well as if you want access to that credit agian, once it has been repaid, without asking for another loan.
What Can I Use the Equity Line of Credit For?
So you have the loan...not what can you use it on. Here are some examples.
Consolidate Debts
Consolidate or wipe out some of your other bills/debts completely. Not only does this make your monthly breathing room a bit wider...but in the long run it will help your credit score and interest rates that are offered to you on other loans as well.
Take care of your "second" on your home.
Use your line of credit to pay off the existing mortgage for better interest rates.
Add On, Update or Go Away
Go on a vacation, re-do a room, or buy a car...all with a interest rate that is far lower then most credit cards. This fact alone makes it ideal for large cost purchases.
Ok...so whats the Down Side?
Before succumbing to what seems like 'easy money' it is important to evaluate the additional risk.
Some debts -- like student loans- have features that you may not be entitled to if you switch them to an equity line of credit.
Other items like cars and vacations may seem like a good idea to buy with your home equity line of credit, but with the ability to pay only the interest you may find the motivation to pay off the debt is lacking and end up owing for items that have lost their value or were consumable. Plan to pay off the debt quickly for the most advantage.
Now refinancing a second mortgage may not be a good idea depending on interest rates and your repayment terms. While lines of credit take advantage of current low interest rates you may find that your regular loans protect you better from fluctuating rates if you will not be paying the loan down in the next few years.
We all understand the freedom and relief that comes from having access to extra funds. For both those emergencies, as well as last minute purchases. However its important to understand the risks as well as benefits.
