Using home equity lines of credit responsibly
Using a credit line to borrow against the equity in your home has become a popular source of consumer credit. This can be a great idea if you need some extra cash, but make sure to know the risks involved when doing this. If you decide to go with this option make sure you are using your home equity line of credit responsibly. Using home equity lines of credit responsibly is important to ensure that you do not get yourself in deep financial trouble, or worse. Consider these guidelines when looking into this option.
What is a home equity line of credit?
A home equity line of credit is a practice where you use the equity in your home, to qualify for a sizable amount of credit. This credit is available for you to use when and how you please. They usually contain very low interest rates which is also very appealing. With a home equity line, you will be approved for a specific amount of credit which is the maximum amount that you may borrow at any time under the same plan. A lot of lenders usually set the credit limit on a home equity line by taking a percentage of the home's value and subtracting that from the balance owed on your current mortgage. In deciding your actual credit limit, the lender will judge your ability to be able to repay, by looking at your income, your debts, as well as your credit history.
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What are some risks?
When you open a home equity line, the transaction puts your home at risk. Whether you pay some, a little, or none of the principal amount of the loan, when the plan ends you may have to pay the entire balance owed, all at once. You must be prepared to make this large payment by refinancing it with the lender, by getting another loan from another lender, or by some other way. If you are unable to make the large overall payment, you could lose your home.
If you decide to sell your home before the loan is paid, you will probably be required to pay off your home equity line in full and almost immediately. Keep in mind that if you are going to sell your home soon, then see if it makes sense to pay all the up-front costs of setting up a line of credit. If you are thinking of renting your home, your contract may not agree with this.
Also, some lenders may have continuing fees throughout the time of the loan. Some of these may be an annual membership or participation fee, which is due whether or not you use the account. They may also have a transaction fee, which is charged each time you borrow money. These fees accumulate quickly to the overall cost of the loan.
Guidelines on using your home equity line of credit responsibly:
Compare the rates
Your credit score will determine what rates you get on your line of credit. Make sure you have a good credit score before deciding on a line of credit. The worse your score, the more the higher your rate may be.
Avoid unnecessary fees
Make sure your lender is adding on fees on the line of credit. Also remember that you shouldn't have to pay for any broker's fees if there is a third party helping with the loan. If you have a great line of credit then application or appraisal fees should be waived.
Know the tax rules
You can usually deduct the interest of the loan as long as you are able to itemize with your deductions. If you do get a deduction tax breaks are limited depending on the size of the loan.
Know what you can risk
Your home is a great investment, but not if you are always borrowing against your equity. If you borrow too much or can't come up with the money in time, you could lose your home.
Keep a cushion
Try to keep a cushion of at least 20% equity in your home. This will ensure that you don't pay higher interest rates if the money you borrow exceeds the amount of your loan and mortgage combined.
Is a home equity line right for you?
If you need to borrow money, then home equity lines may be one great source of credit. Plus, they provide you with large amounts of cash at low interest rates and they may also have certain tax advantages that other kinds of loans don't offer. Home equity loans also give you relatively easy access to cash, which is nice for an emergency.
When using a home equity line of credit, remember the risks involved and act responsibly; it's not worth losing your home over! Having an equity line can be great in some cases, just make sure when using home equity lines of credit that you use them in the best possible way. Always act responsibly when borrowing money from lenders, especially if your home could potentially be at risk.
