What you should use a Home Equity line of credit for
With all of the tempting financing offers available today consumers may be overwhelmed with all the possibilities. If you are considering using your home to free up some cash by taking out a Home Equity Line of Credit (HELOC) it is important to do your homework first. First it is crucial to understand exactly what a Home Equity Line of Credit is:
A Home Equity Line of Credit is not the same thing as a Home Equity Loan. A Home Equity Line of Credit functions as a line of credit using your home as collateral. You are in theory taking out a credit card with the value of your home acting as the security for it.
A Home Equity Line of Credit most often has a variable interest rate. This means as the prime interest rate goes up or down so does the interest rate you pay on your line of credit. Few Home Equity Lines offer a fixed interest rate. Keep in mind that you could open your credit line at a low interest rate and end up making payments at a much higher rate of interest. There is also an annual fee that is charged to keep the Home Equity Line of Credit open. This is vastly different than a Home Equity Loan that is usually taken out a fixed interest rate that stays the same for the life of the loan.
A Home Equity Line of Credit remains open with a fixed credit limit. What this means is that as your pay down your line of credit the unpaid portion becomes available for you to use again. This is also different than a Home Equity Loan that functions as a standard loan. With a Home Equity Loan you simply borrow the amount and then repay the amount plus interest and any fees.
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Now that you know the basics of what a Home Equity Line of Credit is the question remains: What should you use a Home Equity Line of Credit for? There are certain things that should be considered before you open up your Home Equity Line of Credit and start spending. Here are a few-
1. Am I using this to pay off debt? Financial experts report that this is the number one reason consumers often open a Home Equity Line of Credit. There are several good reasons for this-number one being that the interest rate on a HELOC tends to be much lower than most credit cards. Homeowners find that they can easily consolidate bills, lower their payments and save on interest by opening up a Home Equity Line of Credit. Financial experts also report that one of the major problems consumers are now having is that after opening a Home Equity Line of Credit and paying off all their credit cards consumers then revert back to their old ways and begin charging themselves back into debt. This can now have even more serious consequences since the collateral on your Home Equity Line of Credit is your home and by doing this your risk losing it. If you are considering opening a Home Equity Line of Credit to deal with debt be sure you are ready to make some lifestyle changes in order to make this a positive financial move.
2. Am I using this to increase the value of my house? Homeowners are often looking for ways to be able to renovate or redecorate their homes without going into substantial credit card debt. If you are looking for lower cost funding to do either of these a Home Equity Line of Credit just might be right for you. That way when your home does increase in value you have the potential added value to help you pay off your line of credit when you decide to move.
3. Am I looking to travel, pay for college or pay other substantial expenses? Today's lifestyle often necessitates taking on some substantial debt. If you are looking for a way to fund a big expense and are not carrying a lot of other debt a Home Equity Line of Credit can provide an easy way to access cash to take care of those expenses. By careful planning and budgeting utilizing the money available in your home can be cost-efficient financial move.
4. Have I run out of other options and am looking for a way to get cash quickly? If you are in serious financial trouble and have exhausted other options a Home Equity Line of Credit may be helpful. It is advisable though that you seek counseling with a debt professional or accountant if you find yourself in serious financial trouble. Understanding that connecting your debt with your primary dwelling can have serious consequences if you are unable to repay your line of credit is crucial.
