Equity line of credit loans
A home equity line of credit can be understood as a credit card for which your house equity works as the security. Though it works like a credit card, but in the true essence of it, it is a mortgage loan on your house with your house acting as the collateral. The amount that you can borrow under this type of equity loan is dependent on your place of residence, as the home equity line of credit is regulated by local lending laws.
The interest rate for the home equity line of credit is normally close to the prime rate; however, the lender can charge you with some additional amount. Your credit ratings can make a big difference to the interest rate on the home equity line of credit, and a good credits score will get you an attractive interest rate.
The loan programs vary drastically across lenders and shopping around is the only key to getting the best deal. Some lenders are more considerable and can modify a home equity line of credit to suit your individual needs. Now lets take a look at the three most practical ways to use a home equity line of credit:
1. Debt Consolidation:
Even though the home equity line of credit works similar to a credit card, the two are radically different. A credit card usually has a credit limit of a few thousand dollars, where as the limit on your home equity line of credit is usually high and can even be equal to the worth of your property if you have no other borrowings against the house. The major difference lies in the interest rate; with the interest rates on a home equity line of credit more than 50 percent lower than the rate of interest on a credit card. The money can be transacted using checks or a special debit card that comes along with the account.
The most popular use of a home equity line of credit is to consolidate debts because it gives you the opportunity of transforming your high interest credit card balances in to a lower interest credit. Also you are able to get rid of the penalties and the annual fees associated with credit cards. Buying furniture, appliances or making amendments in the house has often led homeowners into debt and if these debts come from credit cards, the atrocious interest rates can drain out all the money from their pockets and savings. Using the home equity line of credit, the homeowner can settle all his outstanding balances and come down to a single payment for an easy to manage loan, on a pleasant rate of interest.
2. Childrens education:
What can be more exhilarating for a parent, than the idea of his child heading towards higher education However it can also be financially depressing because of the skyrocketing cost of education. Using their retirement account might not be the right approach because it will make your retirement plans more vulnerable. At this point of time, a homeowner should start considering the idea of borrowing against the equity of his house.
And the best way to borrow against home equity is through the home equity line of credit, because it allows you to withdraw as and when required, and the interest will be charged only on the amount that you withdraw and for the period for which you withdraw. This is a better option as compared to the equity loan because in the home equity loan you get the entire amount in advance and you will have to pay interest for the entire term. However, for your childs education you will need money at the beginning of each semester and so a one time borrowing will only mean an extra amount going towards payment of interest. If youre bothered about the interest rate being associated with the prime rate, then do understand that the prime rate is not so volatile. And even if the interest rates start taking an unpleasant turn, you still have the option of converting your home equity line of credit in to a fixed rate loan.
On the other hand if youre thinking about borrowing from a different source, consider the fact that you would be missing out on the great tax benefits that come only with loans against your home equity.
A home equity line of credit offers you immense flexibility as you can withdraw money only when it is needed and payback as early as you want to, without worrying about prepayment penalty.
3. Provisions for emergency funds:
Ideally, every family should allocate some amount of money as emergency funds, to fall back upon, in case of someone untoward incident taking place. As a rule of thumb you must keep around six months of your living expenses for emergency funds. However, it necessarily doesnt mean that you need to have it in the form of cash. A home equity line of credit is an equally sensible substitute for emergency funds. Setting up a home equity line of credit gives you instant and direct access to money whenever you need it. Interestingly, there are no payments and no interest charges if youre not using the money, while you still have something to fall back upon.
When you need instant cash, getting a traditional home equity loan can be very stressing because of the time that it takes and on the other hand borrowing against a credit card can be very expensive. And if you already have a home equity line of credit set up, then you can withdraw money anytime you need and without having to bother about a higher interest rate. Also, emergencies usually call for a lot of money and your credit card limit may not just be enough. A credit limit on your home equity line of credit is usually very high which makes it the perfect source to borrow from, in times of emergencies.
Lastly, while a home equity line of credit seems to be the most ideal source of borrowing in most circumstances, this truly will act as one only when you have been prudent while shopping around for it. You have to look for a lender who can offer you lowest possible closing costs, and has no additional fees for using the credit facility or early payment. And in case you wish to keep a home equity line of credit as a source of emergency funds do check with your lender that there are no charges for not using the account for a long period.
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