Equity Line of Credit:Is It Answer to Your Financial Needs?
Jan 16th, 2008 by Kaushik Adhikary
Image via WikipediaOwning your home have financial resources available to you that can help you in your financial needs or concerns. And that is HOME EQUITY.
Home Equity is the value of your home minus the remaining mortgage balance which is outstanding. While you are living in your home, worrying about debts or wishing you could refurnish the living room or any room of your choice, you’ve enough cash that could fulfill your wishes.
Now, why do you need it? Equity Line of Credit-is it answer to your financial needs?
Unlike a typical loan which deposits a set amount of money in your account,that is charging you interest and payments at a fixed or floating rate until repaid, a line of credit acts as a revolving credit (just 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.Equity line of credit (popularly known as a Home Equity Line of Credit or HELOC) gives you greater flexibility with the least cost. Not only can you access the credit only as you need it, but your monthly payments will reflect the balanced used. The less you used the lower your payment will be. 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 great when you don’t have a large fixed amount to spend in one place that will take many years to repay and you want access to the credit without asking for a new loan when you have paid it back.
How could you use the Equity Line of Credit?
While you can undoubtedly find numerous uses for your line of credit, here are some examples of the more common reasons for obtaining an equity line of credit.
Debts Consolidation:
Using your equity line of credit for consolidating 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 your line of credit to pay off the existing mortgage for better interest rates.
Add On, Update or Go Away.That’s it.
You may use your line of credit for renovating your home, buying new furniture or a car, or taking a vacation with less interest payments than using a credit card making it a wise choice for large purchases.
But a cause of concern-when you should NOT use a Line of Credit?
Before jumping at what seems like ‘easy money’ it is important to evaluate the additional risk.
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 option of paying only the interest, you may find be loosing the motivation to pay off the debt and end up owing for items that have lost their value. Plan to pay off the debt quickly for peace of mind.
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.
