How To Wisely Use A Home Equity Line of Credit

 by Greg Cryns

            A home equity line of credit used to be harder to get – but today, lenders are opening the doors to this type of loan to more homeowners who need the money to pay off debt, make renovations, and more!

            When you have equity in your home, you might qualify for a home equity line of credit, which means you have money waiting for 

you to use when you want it and for whatever purpose you want it. You don't have to use it and you will not be paying any interest until you use it. The interest rates for home equity loans are generally low, and you may even find that it’s tax deductible.  As with all loans, you want to make sure the terms are right for your financial situation. 

            Essentially, you’re putting your home at risk, so you want to shop around and get the loan that best suits your needs.  With a home equity line of credit, you’ll have a revolving credit line. 

            You don’t want to use this type of money for frivolous purchases like new clothes or charging a day at the spa.  It’s best to use for major home renovations, college tuition, or debt consolidation.

            When you go through the loan application process, you’ll be presented with a set amount of credit, similar to how a credit card works.  Your lender might set the amount based on a percentage of the equity you have in your home minus the amount still owed on the property.

            Your income does come into play when the lender is figuring out your credit worthiness.  They want to make sure you’ll be able to repay the loan.  Terms will vary from lender to lender.

            With some home equity lines of credit, you’ll only be able to borrow during a fixed timeframe, like 10 years.  You might be able to renew the line of credit, but the lender will have the option of closing the loan and demanding payment in full of the balance.

            The lender might provide you with a credit card to use or checks so that you can withdraw or spend your money that way.  Many plans force you to withdraw a minimum amount each time, such as $500 every time you take money out.

            Your interest rate will usually be a variable rate, not a fixed rate.  You might be able to get a better introductory rate that lowers your initial payments on the home equity line of credit. Variable rate loans have a legal ceiling on the interest the lender can charge.

            Keep in mind that if you sell your home you will be required to pay off any home equity loans you have on the property.

            A major safeguard for borrowers on principal dwellings is the Truth in Lending Act. You have 3 full days to cancel the credit line for any reason. You must notify your lender in writing within the 3 day period. The lender is required to return all fees you paid to start the account. 

            Remember that this type of loan is not much different than a car loan except that your most precious asset, your home, is put up as collateral. The wisest move is not to take a loan of any kind but rather to save up the money necessary and pay for the item in full. I recommend that method!

 

Greg Cryns is the owner of Flat Fee Real Estate Guide - http://www.flatfeerealestateguide.com