For the last few years the "home equity line of credit" has gotten a lot of attention.
Home equity is the value of your home minus the remaining mortgage balance which is outstanding. This equity can be used to cover cost and expenses you may have or be used on home remodeling projects you wish to do.
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 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.
An equity line of credit is a nice thing to have when you don't have a large fixed amount to spend in one place, and when you repay it you want access to the credit without asking for a new loan when you have paid it back.
Do I have limits on what I can use the loan for???
So you have the loan...not what can you use it on. Here are some examples.
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 the equity line to pay off or down your second...in some cases paying down will also allow you to reduce the interest rate. (which is normally higher on a second)
Travel, remodel, or Addon
Cover the cost of an addition, redecorate, or go on a trip...all at a interest rate lower then most credit cards.
When Should You NOT Use a Line of Credit?
While the before mentioned information sounds great...whats the rest of the it look like.
Some types of debt wont allow you to use a HELOC on them. Some student loans...or small business loans.
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.
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.
Home equity is the value of your home minus the remaining mortgage balance which is outstanding. This equity can be used to cover cost and expenses you may have or be used on home remodeling projects you wish to do.
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 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.
An equity line of credit is a nice thing to have when you don't have a large fixed amount to spend in one place, and when you repay it you want access to the credit without asking for a new loan when you have paid it back.
Do I have limits on what I can use the loan for???
So you have the loan...not what can you use it on. Here are some examples.
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 the equity line to pay off or down your second...in some cases paying down will also allow you to reduce the interest rate. (which is normally higher on a second)
Travel, remodel, or Addon
Cover the cost of an addition, redecorate, or go on a trip...all at a interest rate lower then most credit cards.
When Should You NOT Use a Line of Credit?
While the before mentioned information sounds great...whats the rest of the it look like.
Some types of debt wont allow you to use a HELOC on them. Some student loans...or small business loans.
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.
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.
About the Author:
Doc Schmyz has worked with investors all over the US and Mexico. He built a free free website shares Real estate investing information for all over the US. Find Real estate investing information by state
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