Home equity is the value of your home less the remaining outstanding mortgage balance. While you may be worrying about current debts or wishing you could refurnish or remodel your home, you may be sitting on the cash you need.
With a home equity loan or equity line of credit, you can use the value of your home (less the balance owing) and consolidate debts or even remodel your home.
What is an Equity Loan or Equity Line of Credit?
- Unlike a typical loan which deposits a set amount of money in your account and begins charging you interest and payments at a fixed rate until repaid, an equity line of credit acts as a revolving credit (like your credit card).
- In addition, you do not need to pay interest on the full amount you have access to, you only pay for the money you have borrowed. Like a credit card, when the debt is repaid you still have access to the credit.
- Using an equity line of credit (also 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 only the balance used.
- The less used the lower your payment. Some lines of credit have an only interest as the minimum payment, which can be helpful when finances are tight.
What Can I Do With My Equity Loan or Line of Credit?
- While you can probably 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 – Using your equity line of credit to consolidate 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.
- Remodel, vacation, new car, etc. – You may use your line of credit for renovating your home, buying new furniture, a car, or taking a vacation. You would pay fewer interest payments than using a credit card or store card making it a wise choice for large purchases.
Using Your Equity Loan or Line of Credit Wisely
Before succumbing to what seems like easy money, it is important to evaluate the additional risk.
Some debts, such as 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.
By understanding, the risks and making good financial decisions you can get relief from debt and financial freedom.