A home equity line of credit unlocks your home’s value so it can work for you. Owning your home can provide you with a financial resource that can help you with your financial needs.
Since equity is the value of your home minus the remaining mortgage outstanding, you may be sitting on the cash that you can use to improve your financial situation, renovate your home or go on that vacation you’ve always dreamed of.
Why Would You Want a Home Equity Line of Credit?A line of credit is not like a typical loan which provides a lump sum of money to you and then begins charging you interest at a fixed rate until repaid. Instead, it acts like revolving credit (much like your credit card). You only use as much or as little as you want and you only pay interest on the amount you have used. Also, like a credit card, when the debt is repaid you still have access to the credit. In contrast, with a typical loan, you would be paying interest on the full amount of the loan. And when a loan is paid off, you no longer have that credit available to you – you would have to reapply for a new loan.
The main feature of a home equity line of credit is providing you greater flexibility at accessing credit with the least cost. Not only can you access the credit only as you need it, but your monthly payments reflect only the balance you used. So the less you use of it, the lower your payment. Some lines of credit require you to only the interest as the minimum payment. This feature can be helpful when finances are tight. (Be careful, it takes discipline not to use this feature to fuel spending habits).
A home equity line of credit is great when you don't have a large fixed amount to spend in one place. While you can find many uses for your line of credit, here are some more common reasons for obtaining a home equity line of credit.
Consolidate DebtOne of the more important uses for your home equity line of credit is to consolidate debt. You can eliminate the stress of multiple bills and also receive a more favorable interest rate or tax benefit.
Second MortgageYou may come across a time when you find your mortgage interest rate higher than your home equity line of credit’s interest rate. If that is the case, then using your line of credit to pay off the existing mortgage for better interest rates makes sense.
Home Renovations, AdditionsYou may use your line of credit for renovating or building that new addition to your home. You pay less interest than you would if you used a credit card and that makes it a wise financial choice.
When Should You Not Use a Home Equity Line of Credit?Before making hasty decisions with your new found money source, it’s important to evaluate the additional risk.
Some debts have features that you may not be entitled to if you switch them to an equity line of credit. A perfect example is your student loans. They are subject to special conditions that if changed by you, can cost you. You need to check into your student loan terms and conditions before considering moving them.
With the feature to pay only the interest you may lack the motivation to pay off the debt and end up paying only the interest for a long time. When this happens, you end up owing for items that have lost their value over time. It makes more financial sense to avoid using your line of credit to buy items that depreciate and focus on items that will increase in value overt time. Also, make plans to pay off the debt quickly for the most advantage.
Lines of credit take advantage of current low interest rates which means they are subject to fluctuating interest rates. If you need larger financing that will take a long time to pay off, you may find that regular loans protect you better. A fixed rate loan can provide piece of mind knowing that your monthly payments are not going to increase as interest rates go up.
Using your finances wisely can give you great relief and freedom. Before taking on any financial obligations it is important to understand the risks as well as the benefits.
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