Home Equity Lines of Credit – Be Careful

Appreciation rates for real estate have been phenomenal in many parts of the country for the last five years. This creation of massive amounts of equity has lead to interest in home equity loans.


A home equity line of credit provides a homeowner with the liquid equivalent of a hard asset. Real estate has returned excellent rates of appreciation recently. This means the value of homes has risen, creating new wealth for homeowners. The problem, of course, is the wealth is locked into the home and difficult to use. After all, you cannot use a door to pay the bills. To answer this dilemma, lenders have come up with home equity lines of credit.

A home equity line of credit is exactly what it claims to be. Programs vary, but a lender essentially issues you a credit line roughly equal to the equity you have in your home. If you have $100,000 in equity, you get a $100,000 line you can write checks off of and so on. On top of this, the equity line is usually issued with very reasonable interest rates at or just above traditional mortgages. Throw in the ability to claim a tax deduction on the interest paid, and the popularity of home equity lines of credit becomes clear.

Americans are infamous for abusing credit cards. Most Americans carry thousands upon thousands of dollars in credit card debt. If you are not careful, credit card debt can lead to financial disaster. Interest rates on cards are astronomical. Monthly payments are so low that you never really make much headway on the debt if you don’t have the discipline to pay more than the stated amount. Inevitably, a person’s credit card balances will just continue to grow and grow.

A very high percentage of people use their home equity lines of credit to pay off credit card balances. This strategy absolutely makes sense. The interest rates are lower on the equity line and interest charged on the equity line is deductible. The decision is really a no brainer with one caveat.

If you transfer the thousands of dollars in credit card debt to an equity line, you must be careful. Just because your credit cards are free and clear, you should not consider it a license to go out and start making purchases on them. Doing so can lead to financial ruin where you have used up both the equity line and again have massive credit card debt. If you use an equity line to pay off credit card debt, make sure to cut up your credit cards or hide them somewhere so you do not run up the balances again.

For more information, please visit www.mortgagerefinancecoy.com

Home Equity Line Of Credit - Is There A Prepayment Penalty?

For the most part, homeowners are familiar with home equity loans and home equity lines of credit. With either option, you are able to acquire funds for emergencies, home improvement projects, etc. Getting a line of credit and using your home’s equity to your advantage is a huge benefit to owning a home. However, before completing the credit application, homeowners should carefully read and understand the credit line agreement.

How Does a Home Equity Line of Credit Work?

A home equity line of credit is a credit line that is based on your home’s equity. For example, if you owe $80,000 on a $120,000 mortgage, your home’s equity is $40,000. When applying for a home equity line of credit, the lender will approve you for a credit line up to the amount of your home’s equity. Lines of credit are slightly different than home equity loans. While home equity loans are also based on your home’s equity, homeowners obtain a lump sum of money upon approval of their loan application. These loans are generally based on a fixed rate, whereas lines of credit have variable rates.

How to Obtain Funds with a Home Equity Line of Credit

Getting money from your home equity line of credit is very simple. Once a lender approves your line of credit, you will be issued a checkbook or ATM card. Whenever you need cash, you simply write yourself a check from your credit line. Because the amount you withdraw from a line of credit varies, your monthly payments will also vary. If you prefer a predictable monthly payment, a home equity loan will best suit your needs.

Home Equity Line of Credit Prepayment Penalty

Home equity lines of credit have specific terms. Your lender may approve your line of credit for 10 to 25 years. At the end of the term, you must re-apply to obtain another credit line. Home equity lines of credit are similar to other mortgage loans in regards to prepayment penalties.

Before applying and accepting a lender’s offer, carefully review the offer and inquire of prepayment penalties. With a prepayment penalty, you are charged a fee if the credit line is closed before the end of the term. Typical fees are about $500. However, if the balance on your line of credit is zero, but the account remains open for future withdrawals, prepayment fees will not apply.

For more information & expert opinion, please visit www.mortgagerefinancecoy.com

Home Equity Line Of Credit - How To Benefit The Most From A Home Equity Line Of Credit

The options for tapping into your home equity are numerous. Some homeowners choose to refinance, while others take advantage of home equity loans. A home equity line of credit is a great option for homeowners who want access to their home's equity over a length of time. There are benefits to a home equity line of credit. However, to avoid the pitfalls of these types of loan, consider the following.

What are Home Equity Lines of Credit?

Home equity lines of credit are revolving credit accounts that are protected by your home. The term revolving credit is often associated with high interest credit cards. However, lines of credit differ from credit cards. For starters, lines of credit are easier to qualify for. The interest rates are significantly lower than most credit cards, and home equity lines of credit are tax deductible.

Common Uses of a Home Equity Loan

Home equity loans are often obtained for large expenses. These are best used for financing home improvement projects, debt consolidation, paying for a child's college expenses, etc. Additionally, some homeowners obtain home equity lines of credit as a means of having a cash reserve in the event of an emergency.

Pros and Cons of Home Equity Line of Credit

While this home equity option is useful, there are advantages and disadvantages. The benefits surround the ability to payoff high interest credit card debts and other consumer loans.

If using a line of credit for debt consolidation, homeowners will simplify their lives by having a single debt payment, as opposed to several. Furthermore, because of lower rates, homeowners are able to repay a home equity line of credit much sooner.

The disadvantage of home equity lines of credit is that your home serves as collateral for the loan. If for any reason you are unable to repay the loan, the lender may claim your property. This results in losing your home and equity. To avoid foreclosure, borrow a modest amount of money. Also, repay the funds promptly. The problems lies when people think of home equity lines of credit as free money, and begin borrowing and spending frivolously.


For more information, please visit www.mortgagerefinancecoy.com