Home line of credit
More and more lenders are offering home equity lines of credit. By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please, at an interest rate that is relatively low. Furthermore, under the tax law--depending on your specific situation--you may be allowed to deduct the interest because the debt is secured by your home.
If you are in the market for credit, a home equity plan may be right for you. Or perhaps another form of credit would be better. Before making a decision, you should weigh carefully the costs of a home equity line against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And remember, failure to repay the amounts you've borrowed, plus interest, could mean the loss of your home.
The first thing that you need to know when working with home equity lines of credit is exactly what they are. As the name implies, a home equity line of credit is an amount of credit granted by a bank or other financial institution that uses the equity that you have built up in your home or other real estate as security to guarantee that anything charged to the line of credit will be repaid. This line of credit acts just like any other credit card or credit line, with the only major exception being the nature of the security used for the credit line.
Some home equity line of credit pro and cons
Pros:
Most home equity lines of credit have little or no closing costs.
You only need to make interest only mortgage loan payments which means lower monthly mortgage payments than with a fixed interest rate loan. Variable mortgage interest rates are usually much lower starting rates than with fixed interest rate loans. You can use the loan to draw on only as you need the money. You only pay interest on the money used not on the entire loan amount. You can use the remaining unused balance of the equity line as an emergency fund.
Cons:
Variable mortgage interest rates are not stable and could go higher than a fixed interest rate loan. Monthly mortgage payments are not level and can fluctuate a great deal. Most home equity lines of credit have yearly fees paid to the lender. With equity rates rising quickly it's easy to spend your all of your home equity. It makes sense to use the equity in your home to pay down debt, or pay credit cards off. But use the money wisely and only use as little equity as you have to. Hopefully these home equity line of credit pro and cons will make your choice of equity loans easier for you.
Uses of Home Equity Lines of Credit
Since home equity is usually quite high in value, the amount of credit that can be established in a credit line based upon it also tends to be quite high. This can open individuals up to credit limits that they have never had before, which they can use for a variety of different purposes. Many individuals who take out credit lines based upon the equity in their house or other real estate use the new credit for larger projects, such as home improvements or debt repayment.
These lines of credit might also be used to pay for college or other educational expenses for individuals or their children, or may simply be used as the means for financing the vacation that a person has always wanted to take but has never really had the money.
Obviously, the choice is up to the homeowner... but it's important to keep in mind that whatever is borrowed against a home equity line of credit will have to be repaid with interest.
Home Equity Line Of Credit Vs Home Equity Loan
Home Equity Line Of Credit
Home-equity lines have experienced unprecedented growth in the past two years and presently represent 80 percent of the home-equity market.
A home-equity line of credit is a varible interest rate loan that works like a credit card. You get a pre-determined loan amount that is secured by your home.
Most come with checks and credit cards that you can use to draw on as you need the money.
Most lenders only require an interest only payment for either 10 or 15 years. After that the loan must be paid in full. The reality is most people will sell their home and pay the loan off before it actually comes due. You could always refinance if you decide you want to stay in your home.
An important thing to remember on a home-equity line of credit is it is based on varible interest rates. These varible rates will cause your payment to change as the interest rates move up or down.
Home Equity Loan
A home-equity loan has a fixed interest rate and fixed payment. These loans are more like a standard second loan on your home. Like a home-equity line of credit, these loans are also secured by your home.
You borrow a certain amount of money for a specific period and get the whole sum at the close of the loan. The payments a on home-equity loan are typically based on 10 to 15 years and are level.
People who aren't comfortable with an adjustable or varible rate payment tend to favor a home-equity loan instead of a home-equity line of credit. As interest rates rise, these loans become more popular than home-equity lines of credit.
A home-equity loan will have a higher interest rate because it is fixed. Varible
rate loans usually have lower starting interest rates. But if interest rates are rising, a varible rate could catch up or even get higher than what the fixed rate is.
Things to Look for in a Home-Equity Line of Credit
1. No application fee (or fee should be refunded at closing).
2. No appraisal or closing costs.
3. No account maintenance or check-writing fees.
4. No "non-usage" fees.
5. Variable APR equal to or near the prime rate (adjusted quarterly).
6. Periodic cap on interest rate changes (the amount that the rate can be changed at one time).
7. Lifetime cap on rate increases (the amount that the rate can be adjusted over the loan's life).
8. Ability to convert to a fixed rate loan.
9. Interest-only payments allowed.
10. Unrestricted ability to repay principal without penalty.
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