Why Choose a Home Equity Line of Credit?
Debbie WilsonLoanBiz Columnist
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.
Source:
Federal Trade Commission
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.
