Why Choose a Home Equity Line of Credit?

Debbie Wilson
LoanBiz Columnist

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Using a credit line to borrow against the equity in your home has become one of today's most popular means of obtaining consumer credit. With so many lenders and loan options, the challenge will be to select the home equity credit line best tailored to suit your financial needs.

Advantages of the Home Equity Line of Credit (HELOC)

If your need for cash is intermittent, such as tuition payments, or will be stretched out over a period of time, like an extended home improvement effort, a home equity line of credit may be a useful source. Initially, it can feature a fairly low interest rate and with little upfront expense. The flexibility of being able to pay down and reuse the loan, and the fact that you only pay interest on the money you actually use are advantages associated with a HELOC. Like other mortgages they may also provide you with certain tax advantages.

Disadvantages of the Home Equity Line of Credit

Unlike unsecured financing, an important disadvantage of the home equity line of credit is that it requires you to use your home as collateral for the loan. Skip your payments and you could be putting your home at risk. Additionally, HELOC loans have variable rates. Your payment fluctuates depending on your loan balance and the changing interest rate, making it harder to budget. However, some programs offset this disadvantage by giving you the chance to fix your rate at different times over the life of the loan.

Other Cash Options

In addition to a home equity line of credit, many lenders today offer second mortgage installment loans. These loans typically feature fixed rates that are much lower than those of unsecured loans and are ideal when you need a large sum of cash delivered at closing.

Finally, there are other loans that don't use your home as collateral. While they carry higher rates, these unsecured credit lines allow you to use your money as needed and don't put your home at risk if rates increase.

Ultimately, the decision of whether to take out a home equity line of credit should depend on your specific short- and long-term goals. A home equity credit line can be a smart way to use your home's equity to finance big-ticket items, while offering a low-interest alternative to high-interest credit cards. And with greater flexibility and tax advantages, it may be the right loan for you.

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About the Author
Debbie Wilson owns and operates a lakeside resort. Her previous experience includes profitability consulting for a national healthcare company. Debbie holds a B.A. in Business Management with a minor in Physical Education.

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