If your home is worth more than amount you owe on your mortgage, your home has equity. A home equity line of credit is one of the many options for home loans where your equity is used as collateral.
When you obtain a home equity line of credit, also known as a HELOC, you are gaining access to a revolving credit line up to a specific limit. You are only charged interest on the amount of the credit line you use. Your credit agreement will spell out the annual percentage rate. Interest rates are usually lower than other kinds of consumer loans.
This kind of credit agreement can be beneficial to you and your family if is used wisely. But keep in mind that home equity lines of credit put your home at risk if you are unable to pay back the loan. They also come with fees and closing costs.
One of the best reasons to open a home equity line of credit is to get quick access to cash for emergencies, such as unemployment or unexpected medical bills. The lines come with checks you can use to pay bills or move money to your regular checking account.
A home equity line of credit can also be used to consolidate other monthly bills, such as high-interest credit card debt. However, you need to make sure to close those other credit accounts so you don’t continue to generate more debt.
A home equity line of credit is also useful when you want to make improvements to your home. It’s an alternative to home improvement loans or store credit cards.
In fact, a home equity line of credit can be used for any purpose. You could use one to start a business or even purchase investment properties. But if those ventures fail, you may regret putting your home at risk.
Here’s a good general rule when it comes to tapping your home equity line of credit: If you are purchasing something that won’t bring revenue back to you, don’t use it. This includes purchasing vehicles or going on vacations.
If it’s not due to a short-term emergency, your home equity line of credit shouldn’t be used for your regular household expenses. If you’re in that bind, you should consult with a financial expert for help budgeting.
As with any financial decision, you need to compare options, interest rates and terms with different lenders. Check with your current bank, credit union or mortgage lender. A financial advisor can also help you determine if a home equity line of credit is the best option for your current or future needs.
