Home equity lines of credit
5 tips to get the best of Home Equity Lines of Credit (HELOC)
Home equity lines of credit have become important budgeting tools of most Americans. In the early days of its inception, borrowing against home was looked upon with trepidation but aggressive marketing strategies coupled with flexible terms and conditions have elevated them to the commonplace. Recent SMR findings evince that Americans owe 719 billion dollars on Home equity lines of credit, which exceeds the collective balance on all popular and general purpose credit cards. The figures evidently testify the raging popularity of these types of loans but to someone contemplating entering the bandwagon it might be prudent to deliberate upon the suitability of one kind of loan over another.
Tips to choose wisely home equity loans versus lines of credit.
The key in deciding, which loan better addresses your need - is it the lump some equity loan or little-at-a-time HELOC - it is important to understand the loan types, how they work and when to use them.
So what is a Home Equity Loan - A Home equity lines of credit is essentially a second mortgage. In this the home is offered as a collateral against which a lump-some amount is given to be paid back in a fixed pre-payment program. It lays down the interest rate, the monthly payment, and the term for repayment of loan.
A Home Equity Line of Credit, also known as a revolving loan works like a credit card. There is a credit limit set against ones homes equity (obtained after subtracting balance owed on existing mortgage), which is the maximum amount he can borrow at any time under the plan. In this type of loan, one can draw as much as he needs to and pay back as often as he can.
A home Equity Loan could be ideal if you know exactly how much your purchase is likely to cost you. It is best suited for those who need money in one lump sum for funding one-time occasions such as consolidating high-interest credit card debts, or funding a family wedding, and you need several years to pay it off.
A Home equity lines of credit is more suited to fulfill intermittent need for money as opposed to bulk cash. Such loans are best suited to meet unforeseen emergency situations. An illness in the family for instance, where there could be a sudden need for money. In this case the borrower can repay the loan amount conveniently after the crisis is over so that he can keep as much of the credit available to support him through future contingencies.
A HELOC gives you greater liberty in managing your debt repayments than does a Home Equity Loan. It gives you the flexibility to borrow what you need when you need it and repay back as you can. While you must pay the interest charges accrued against your loan the principal can be paid in proportions that best suit your finances.
As for home equity loans the borrower must pay a portion of the principal coupled with the interest for the entire life of the loan.
In order to avoid the rigors of Home Equity Loans more and more people have switched to Home equity Lines of Credit. A survey by Interest.com show that the average HELOC charges just over 8% up from 5.1 % recorded two years ago. The rates on home equity loans average at 7.8%. Interestingly home equity lines of credit is still the loan of choice for homeowners who dont have an immediate need for money, but who want the flexibility to borrow against the value of their home by just writing a check, or using a debit card linked to their credit line.
Six best ways to spend helocs
Increase your homes worth
This one here tops the list of most financial pros. You can build on your homes equity by adding bedrooms, a bath or a family room or impart a structural integrity to your house with a new roof. Such additions can significantly raise the built-up equity on your house. It could be a money-spinner if you plan to sell it.
Pay off high interest credit card debts
If you have defaulted in making credit card payments you may zero in on Home equity lines of credit which has comparatively lower rates of interest, to pay off your debts altogether. By doing so you may salvage your credit score as well.
Funding education
Escalating costs on education may be met by using your home equity line of credit. In such investments there may be delayed or no returns but it is worth the risk.
Rainy day fund
Misfortunes come unannounced. A job lay-off, a serious illness, a major home improvement or a car repair can leave you desperate. Your home equity line of credit can serve as a hedge against unemployment uncertainty and other catastrophic events that might cross your path. Many HELOC borrowers treat their loans as security blankets to set some reserve aside for emergencies.
Buy a second home
Put your money into buying a vacation home at a desirable place. An expense as this is more akin to an investment as you are leveraging one appreciating asset to buy another. You can rent it out or sell it; in either case it rains money.
Start a business
Accessibility to cash is the first step to starting a business venture. But the stakes are great as well. In case the venture is a wash-out you may face foreclosure on your house.
In essence, invest your home equity line of credit in areas that can be viewed more as an investment and is likely to soar in value over time rather than splurging it on things as cars and Plasma televisions or vacations, which either depreciate in value over time, or make no addition to your earnings. Caution is the key to spending your home equity line of credit because a grievous mistake may lead you to loosing your biggest asset your home.
Prevent foreclosure plan your payment schedule ahead of time
Before entering into a plan consider how you may repay the loan amount without hiccups as defaulting in loan payments will cause your lender to foreclose your home. Payment schedule may vary from plan to plan; hit the one that best fit into your budget.
Some plans set minimum payments, to cover a portion of the principal (the borrowed amount) plus accrued interest. In this you might have to make higher monthly payments. Other plans may require you to pay the interest alone for as long as the loan term exists. At the end of the term the principal needs to be paid back in one balloon payment. In this, the monthly payments are comparatively low but one must be sufficiently resourceful to pay off the principal in bulk. If again, your plan has a variable rate of interest your monthly payments may change from time to time. This could get inconvenient as the interest rates may climb higher than with what you started.
Some bamks and financial institutions as Bank of America, Wells Fargo, and Washington Mutual offer hybrid credit lines that allow the borrower to set a fixed rate on some or all of a HELOCs balance. David Rupp, a home equity executive with Bank of America suitably illustrates a hybrid credit line as a home equity loan with a home equity line of credit. This surely saves the customer from the indefiniteness and uncertainty of variable rates governing certain HELOCs.
Get clued into a shopping plan
When shopping for a home equity line of credit, look for a plan that best caters to your need. Read the credit agreement; examine the terms and conditions governing the plan. Compare the annual percentage rates (or APRs)as offered by various lenders. Here is what to look for:
Interest changes and related plan features:
Typically, Home Equity Lines of Credit involve variable rather than fixed interest rates. Since the variable rate depends on the prime rate that constantly fluctuates it is important for the shopper to find out which index is being used and how often the value of the index changes.
A shopper must also be aware of the safeguards offered by law. Variable-rate plans secured against a dwelling must, by law, have a ceiling (or a cap) on the interest rate to arrest its increase after a certain point during the loan term. Ensure that you are well protected against unjustified imposition of high interest by your lender before zeroing in on a plan.
Closing costs Compare the closing costs offered by various lenders. Some may tuck in exceptionally high closing costs with your loan agreement while some may waive a portion or all of the closing costs.
Factor in the cost of establishing and maintaining a home equity loan
The cost of setting a home equity line of credit is almost similar to those paid while buying a home.
*A fee for property appraisal to gauge the worth of your home.
*A non-refundable application fee even when turned down for credit.
*Fees for attorney, title search, mortgage preparation and filing; property and title insurance; and taxes.
*Continuing fees throughout the life of the loan which may include an annual membership or participation fee, which is due whether or not you use the account, and/or a transaction fee, which is charged each time you borrow money.
These fees add to the overall cost of the loan. Factor them in before deciding on the desirability of such a loan.
A home Equity Line of Credit is very convenient because of lower interest rates and higher credit limits. Kay Warden, a certified financial counselor admits that there is a huge temptation to use a home equity loan or line of credit to pay credit card debts but she says homeowners need to think hard before doing it. "They're putting their house on the line and they're turning short-term debt into long-term debt. They need to learn to live within their means before they consider tapping home equity" she adds. If this fact is borne in mind their can be a lot that Americans can do to prevent bankruptcy and foreclosures.
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