We all know by now that home owners have a hidden savings account…its called HOME EQUITY.
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.
When using an equity line of credit (also known as a HELOC) it 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. In some case you even have an option of paying just the intrest on the amounts used for a specific span of time.
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.
Take care of your “second” on your home.
Use your line of credit to pay off the existing mortgage for better interest rates.
Travel, remodel, or Addon
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.
The Down Side of a Line of Credit.
Now it isn’t just ‘easy money’. It does have risk to it.
In some cases you can’t use a HELOC to repay certain loan types. some types of student loans, small business loans, etc. You need to review the “target debt” you wish to use it on before taking out the 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.
A 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.
Doc Schmyz has invested all over the US. He built a free website shares Real estate investing information for all over the US. Find real estate information by state