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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.
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