Is an Equity Line of Credit the Answer to Your Financial Needs?
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?
Unlike 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 as a revolving credit (like your
credit card). You do not need to pay interest on the full amount you
have access to -- you only pay for what you have used. Also, like a
credit card, when the debt is repaid you still have access to the
credit.
Using an equity line of credit (also known as a Home Equity Line of
Credit or HELOC) gives you greater flexibility with the least cost. Not
only can you access the credit only as you need it, but your monthly
payments will reflect only the balanced used. The less used the lower
your payment. Some lines of credit have only the interest as the
minimum payment which can be helpful when finances are tight.
An equity line of credit is great when you don't have a large fixed
amount to spend in one place that will take many years to repay and you
want access to the credit without asking for a new loan when you have
paid it back.
What Can I Use the Equity Line of Credit For?
While you can no doubt find numerous uses for your line of credit, here
are samples of the more common reasons for obtaining an equity line of
credit.
Consolidate Debts
Using your equity line of credit to consolidate other debts can not
only eliminate the stress of multiple bills but can also give you a
more favorable interest rate or tax benefit.
Second Mortgage
Use your line of credit to pay off the existing mortgage for better
interest rates.
Add On, Update or Go Away
You may use your line of credit for renovating, buying new furniture or
a car, or taking a vacation with less interest payments than using a
credit card or store card making it a wise choice for large purchases.
When Should You NOT Use a Line of Credit?
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.
Second mortgage (or refinancing) may or 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.
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.
