We all know by now that home owners have a hidden savings account...its called 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.
Would You Want an Equity Line of Credit?
With a normal 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 sort of like a credit card account. You do not need to pay interest on the full amount you have access to -- only on the amount you have used. (And in some cases you then have access to the account again.)
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???
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
Use the home equity line to reduce or consolidate your other debt. Not only will this help your credit score...but it can help reduce your interest payments as well.
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
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.
Ok...so whats the Down Side?
Now it isn't just 'easy money'. It does have risk to it.
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.
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.
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.
Would You Want an Equity Line of Credit?
With a normal 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 sort of like a credit card account. You do not need to pay interest on the full amount you have access to -- only on the amount you have used. (And in some cases you then have access to the account again.)
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???
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
Use the home equity line to reduce or consolidate your other debt. Not only will this help your credit score...but it can help reduce your interest payments as well.
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
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.
Ok...so whats the Down Side?
Now it isn't just 'easy money'. It does have risk to it.
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.
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.
About the Author:
Doc Schmyz has worked with investors all over the US and Mexico. His free website shares Real estate investing information for all over the US. Find Real estate investing information by state
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